Thursday, November 1, 2007

Balancing Upside And Downside Risks

"The Committee judges that, after this, the upside risks to inflation roughly balance the downside risks to growth". With that statement, the Federal Reserve summed up the decision to lower the Federal Funds rate by 1/4 point to 4.50% at the October Federal Open Market Committee Meeting. The Fed figures that rising commodity prices, especially oil, pose as great a risk of igniting inflation as the risk of lower growth of the economy created by the credit crunch and struggling housing market.

The continued downward trend of the dollar, a result of lower interest rates, added to the tension the Fed's decision has created as it walked the tightrope of maintaining employment and growth without increasing the likelihood of a new round of inflation. Data from the Bureau of Labor and Statistics indicated the economy was growing at a higher that expected annual rate of 3.9% in the third quarter, but the purchasing manager's survey showed weak manufacturing data for the month of October. Initially, the market took the Feds move with a bullish move on Wednesday climbing 137 points, but as the reality of the severity of the economic situation became evident, the market subsequently sold off 362 points on Thursday.

A report from the Commerce Department indicated consumers scaled back their spending in September as worries mounted about a worsening housing market and further credit market turmoil. A trade group reported that manufacturing in the U.S. grew in October at the weakest pace since March. This combination of factors led investors to pull back sharply from Wednesday's rally, after the Fed said the economy had weathered the summer's credit crisis.

With the market's growing pessimism about the economy, the Labor Department's report on October jobs creation, scheduled to be released Friday morning, will be taking on even more importance than usual. The combination of no more rate reductions, rising oil prices, continued credit concerns and slower economic growth indicates a need for investors to be cautious in their risk assessment going forward. While I don't see definite indications of recession, caution is always prudent during times of market duress.

John Kaighn

Jersey Benefits Advisors

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