Tomorrow’s Important Number
Wednesday, March 22nd, 2006
By Michael Lombardi, MBA for Profit Confidential
Tomorrow, the U.S. Government will release the new U.S. inflation figures. Since the Federal Reserve’s focus is on keeping inflation low, the numbers released tomorrow will be closely watched by the Fed. and help it decide on further interest rate increases ahead.
The Federal Funds Rate is now at its highest level in about five years. And most market watchers believe the Fed has raised rates so aggressively in an effort to tame inflation and to cool the housing market. While the housing market in the U.S. has definitely cooled, the Fed likely continues to be worried about inflation.
U.S. factory orders, when you take out the volatile transportation sector, jumped 1.6% in January-their best showing in five months. When factories are busy and orders for their products are rising, the prospect of higher prices (inflation) is always present.
From what happened following 9/11, the Fed has clearly demonstrated it’s ready to drop interest rates “in a flash” if the economy cools too much or if signs of deflation appear. But the Fed is also concerned, rightfully, about inflation. It doesn’t want a repeat of the late 1970s and early 1980s when inflation got out of control and interest rates quickly jumped to double digit levels.
Hence, the Fed is doing a balancing act. And I believe it does its job quite well. My only criticism is that I’ve often seen the Fed move too far raising or lowering interest rates, and that’s what causes a problem. In my opinion, the Fed raised rates too quickly in 1986 and 1987, resulting in the October 1987 stock market crash. The Fed then lowered interest rates too low following 9/11, causing an unprecedented boom in the housing market and far too much debt amongst consumers.
This time will be no different. The Fed will eventually raise interest too far, if it already hasn’t. The advice I give my readers: Look at your investment portfolios and ask the question–how will my portfolio perform in the new era of high interest rates? What changes do I need to make to my portfolio to make it work with higher interest rates? Do I need less stocks, more gold, more T-bills, less real estate? Maybe.
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
