A Measured Increase To Come

Federal Reserve Chairman, Alan Greenspan testified before Congress at the end of April and sent equity markets promptly trending lower as investors became increasingly nervous at the prospects of higher interest rates. On May 4th, the Federal Open Market Committee (FOMC) left the targeted Fed funds rate unchanged at 1.0% but indicated through its accompanying statement that market accommodation was no longer necessary and that rates would be moving higher in future months in a measured way. When the Federal Reserve begins to increase rates, the impact on markets, both fixed-dollar investments and equities, may be unfavorable and overblown in the short term. In our opinion, a measured increase in the Fed funds rate would not be detrimental to business and industry. However, the onset of an increase in rates will likely be ballyhooed as an impediment to further economic recovery. We do not believe that a 100 basis point increase in rates (as long as it is done in increments) will represent any real impediment to economic growth. With prices increasing at both the wholesale and retail levels, and the deficit now increasing at the rate of nearly $2.0 billion a day, Mr. Greenspan cannot wait much longer before increasing rates. History demonstrates that during election years, rate policy makers have been reluctant to increase rates until after the elections. During this election season, it is anyone's guess.

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