Market Analysis

The Federal Open Market Committee begins a two-day policy meeting today, and is broadly expected to cut its benchmark fed fund rate by 25 basis-points.  Fed Chairman Bernanke and his fellow central bankers will likely tweak the language of their post-meeting statement to reflect their concerns regarding rising inflation pressures.  The committee's monetary policy decision together with the rationale behind that decision will be made public at 2:15 p.m. ET tomorrow. 

  There is a sense among market participants that the Fed may, in a sense, telegraph the results of Friday's April nonfarm payroll, with the tone of their post-meeting statement tomorrow afternoon.  If the Fed believes the worst of the contraction in the labor sector is behind us -- look for their post-meeting statement to clearly hint at a pause in future rate cuts.  In my judgment, it will take a headline April job loss of 80,000 or less to support this position.  Under this scenario mortgage interest rates will likely begin a plodding climb to higher levels. 

  On the other hand, if the Fed senses/knows that the April job loss figure will exceed 80,000 -- it is highly likely that the text and tone of their post-meeting statement will strongly imply that the door is still open for subsequent cuts to the fed fund rate as the year progresses.  This scenario will tend to be supportive of steady to fractionally lower mortgage interest rates.

  In my opinion, current economic measures are showing significantly higher levels of activity than the government's values that lag by two or three months.  For instance, federal withholding tax receipts (a leading indicator of employment growth) are growing at a significantly faster pace than the statistics from the Bureau of Labor suggests.  I think Mr. Bernanke and his fellow central bankers are very focused on this type of "inside" information - and will therefore see the economy as stronger than the standard macro-economic data might otherwise suggest.  If my assessment proves accurate, look for the Fed to cut short-term interest rates by 25 basis-points while simultaneously using their post-meeting statement to indicate further cuts to their benchmark fed fund rate are unlikely for this cycle.  Should this scenario manifests itself -- the prospects for notably lower mortgage interest rates will fade dramatically.   THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME