There's no denying that interest rate cuts have a positive effect on our economy. There really are no industries that are hurt by a Fed cut, since it helps bolster economic activity. Let me take a moment to explain this "ripple effect."
First and foremost, a rate cut will shore up some of the disparity between market rates and interest rates. Market rates, based on Treasury securities, have plummeted. For example, the 10-year Treasury bond recently broke through the 4% barrier and is currently at 3.93%. The 3-month Treasury bill has fallen to only 2.88%, which is a whopping 1.62% below the current Federal Funds rate at 4.5%. The Fed cannot fight market rates, and so the faster these rates fall, the more the Fed will have to cut.
Obviously, the Fed should continue to cut interest rates to shore up the housing sector, which remains a major drag on the economy. The fact that the Fed is lowering its inflation forecast is essentially an admission that core inflation is well within its unofficial "comfort zone," so it can continue to make rate cuts without worrying about increasing any inflationary risks. To prove this, the Fed recently lowered its forecast for the core Personal Consumption Expenditure (PCE) index to range between 1.7% and 1.9% from its previous forecast of between 1.75% to 2%.
The fact that Fed is setting itself up for a series of interest rate cuts should help to boost investor optimism. There has been some stunning economic news recently, but a lot of confusion as well. The third-quarter GDP was revised up a full percentage point to 4.9% due to the biggest surge in productivity in four years, falling unit labor costs and surging exports stemming from a weak U.S. dollar. However, the Fed now expects 2008 GDP growth to range between 1.8% and 2.5%, which is less than its previous forecast of 2.5% to 2.75%. This has raised concerns.
In the Fed's latest Beige Book survey, which details economic activity throughout the country, California, Nevada, Florida and Arizona are the areas hardest hit by the housing slump. And since housing accounts for as much as 11% of the jobs created in the United States, the housing sector's slowdown will have a definite impact on employment.
Perhaps this is the reason why the Fed raised its 2008 unemployment range by 0.1% to fall between 4.8% and 4.9%. This was a bit surprising considering that the current unemployment rate is already 4.7%, but they're probably erring on side of caution with that conservative estimate.
While the market was deciphering the Fed's latest statement, a lot of people missed the excellent news that came out from the oil patch. Oil prices fell by more than $6 a barrel this week due to rising inventories. Apparently economists are now figuring out that as oil prices rise, demand drops! The International Energy Agency (IEA), which is the industrialized world's energy watchdog, lowered its prediction for global demand growth for the fourth quarter, which eased fears of a short-term supply crunch. Additionally, some OPEC officials may consider raising the production ceiling at their December 5 meeting. Clearly, the world is not about to run out of oil anytime soon. Of course, having lower interest rates might make consumers a little more willing to fuel up their gas tanks.
Lower rates will certainly help boost investor confidence and keep consumers spending. And the good news is, that's already happening. My favorite Emerging Growth retailers started the holiday shopping season on a very strong note: Since Black Friday, Deckers Outdoor (DECK), which makes those popular UGG boots, is up 16.4%. Gamestop (GME) has added 11.5% on strong demand for electronic games.
Even if the broader market cools in the fourth quarter, our Emerging Growth stocks are sure to heat up this holiday season and well into the new year. The average Buy List stock is now posting 37.6% sales growth and 222.4% earnings growth, and our Buy List as a whole is heavily weighted in the economy's hottest sectors.
