What the Fed Should Say

Today is Fed day. That’s when we will get the latest policy
announcement and economic outlook from the Federal Open Market Committee
(FOMC). There are 8 of these meetings a year, and the Fed uses these meetings
to decide whether to change interest rates, among other things.

FOMC have been market-moving events for a while now, as the
U.S. economy has struggled.

When the Fed has good news for the markets, its job is easy.
But days like today require some careful comments.

You might remember Fed Chief Bernanke’s ill-advised
“unusually uncertain” comment from his July Congressional testimony. Second
quarter GDP growth had just slowed to 1.6% from 3.7% in the first quarter.
So, yeah, things may have looked uncertain. But that doesn’t mean that the
Fed, who’s supposed to be on top of things, should acknowledge that it is
uncertain of what’s going on.

It must be remembered that economics is a social science.
There aren’t absolute right or wrong answers. Sentiment, confidence, and
belief are critical components in the economic equation.

Bernanke may be an economist. But he’s also Fed Chief. He
has power not only over the economy, but also sentiment. And a little bullish
talk can go just as far as an interest rate cut or new Treasury buyback in
giving investors confidence that there is strength in the economy.

Of course, Bernanke must acknowledge challenges or he’ll be
seen as out of touch. But the bottom line is that we need our leaders to be
decisive, confident and in control. So let’s not have any more of that
“unusually uncertain” talk.

In my opinion, the best thing the Fed could do right now is
nothing. Bernanke should say the economy has regained some momentum and
there’s no need for more stimulus this year and may not be needed at
all.

Give investors some confidence, Ben. Show us you’re in
control.

New home construction for August made a big unexpected jump higher. That’s great
news, and some are even saying the housing market has found a bottom.

I’m not ready to call bottom for the housing market, though
it’s likely we’ve seen the bottom for homebuilding stocks.

Still, any positive economic data is welcome at this
point.

You might have
noticed that today’s home construction failed to give stock prices a lift.
Even the builders are down a bit.

Of course, stocks rarely move much ahead of a Fed
announcement. But we also may be seeing a situation where the god news has
already been priced in. The S&P 500 is up 9.6% since August 31. And there
hasn’t much downside to speak of since this rally began.

Investors will always take a break to ponder valuations
after a nice run higher. It’s called consolidation. We saw a few days of
consolidation after the S&P 500 broke above 1,120. And while another 10
points may not seem like much, I suspect investors will want to take a few
days and ponder the breakout above 1,130.

We still have weekly unemployment data, durable goods and
leading indicators on this week’s economic data calendar. Any of these could
move the market, and if we are in a consolidation period, that move would be
to the downside.

If you’ve been watching this rally from the sidelines, a dip
later this week would be one to buy. 1,170 or better is still the target for
this rally.

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