Outlook: Relief, but the bubble is still growing

Click to follow
The Independent Online
PHEW! So it's only the quarter point afterall. Furthermore, US monetary policy has been returned to a "neutral bias", which should mean Alan Greenspan won't be going the extra quarter at next month's meeting either. It appears that markets should not have worked themselves up into such a lather afterall. Everything's fine, the non-inflationary boom in the US economy continues unabated, and so too should the great bull market in equities.

That, at least, was the euphoric reaction of Wall Street last night, with the Dow Jones Industrial Average soaring back towards its all time high.

If only the outlook was so rosy. In its statement last night, the Federal Open Market Committee as good as admits it doesn't fully understand what's going on in the US economy. "Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near term policy action", it said.

There are no visible inflationary pressures in the US economy, so there is no need to do anything other than remain vigilant, the Fed is saying. The problem with this stance is that as long as the Fed remains sanguine, the Wall Street price bubble will continue to grow. Markets are nothing if not self aware. Wall Street has an expression for what's going on. Investment bankers call it "reaching for yield" and it means that the longer the good times roll, the more oblivious to risk investors become. The US economy continues to look the best around, but you need strong nerves to invest there right now.

Comments