Wednesday, March 19, 2008

Stock Market Swings To Continue

Look for continued wild swings in the market for the foreseeable future as the current economic situation works itself out. At this juncture the Federal Reserve has committed to shoring up the financial system and mitigating the effects of a deceleration in economic growth. The current consensus of economists is that the US is in recession, or very close to it. While the definitive answer to the recession question will be confirmed after the fact, the Fed has seen enough downside risk to the economy to cut the Federal Funds rate to 2.25%, but has also stated that inflation is a concern.

Fed chairman Ben Bernanke, who studied The Great Depression in detail, feels one of the foremost causes of the prolonged downturn in the 1930's was the central bank's reluctance to lower interest rates. Unfortunately, when the Fed takes this type of action, the dollar becomes weaker and inflation becomes a very real risk. While last month's inflation news was muted, there are fears the renewed speculation in commodities, especially oil, will ignite another round of inflationary pressures. It is too soon to know if the Fed moves and the stimulus plan implemented by the Legislative and Executive branches of the government will stave off recession. There are concerns that the increased stimulus may actually overheat the economy in the second half of the year.

While the markets have been in a bit of a panic mode recently, Bernanke and company have taken the right steps to handle the crisis. If inflation begins to accelerate and global demand for commodities doesn't subside, look for the Fed to stop lowering rates and begin to raise them in the second half of the year. My guess is the Euro and other currencies, which have strengthened against the dollar, will weaken considerably as the global slowdown begins to take hold. Just as the stock markets of the world have not decoupled from the US stock market, the global economies and consequently their currencies have also not decoupled from the dollar.

John Kaighn

Jersey Benefits Advisors

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