The Fed Quandary

Federal Reserve Chairman Bernanke spoke before Congress this week during the semi-annual Humphrey Hawkins testimony. He reported modestly slowing economic growth is estimated for the remainder of this year and into next year as the economy expands at a 3% rate.

Fed expectations are for employment to pick up and unemployment to drop to the 7% area by 2011. In 2007 when the last economic expansion was at its peak unemployment stood at 4.5%, a level near which economists declare full employment. With interest rates nearing all time historical lows the Fed is stuck in a quandary. Perhaps Senator Jim Bunning (R., Kentucky) was most direct when he asked the Fed Chairman, “Are you out of bullets?” The Fed Chairman went on to explain the various tools which are at its disposal to stimulate the economy if a double dip recession lies ahead.  Those tools center on asset purchases and lowering the rate that the Fed pays to member banks for deposits in order to stimulate lending. While the Fed Chairman does have some tools left, he has pretty much exhausted his biggest tool.  That is why the focus of investor thought has centered on government spending and budget deficits.  It is now time for the government to review its priorities and set the stage for business leaders and entrepreneurs to begin the next economic expansion.

This week was a good week for General Motors as they plan on using taxpayer money to invest in a subprime lender named AmeriCredit. U.S. taxpayers now are the largest auto manufacturers in China! And Buick is their favorite brand. “Wouldn’t you really rather drive a Buick?” The irony is all too sweet for readers who are old enough to remember the once famous advertising slogan. Soon GM plans to IPO their stock again in hopes of paying back the taxpayer. Perhaps a national vote should be held. We think the taxpayer would like to continue being the largest auto manufacturer to the Chinese. Ford had a good week when they announced 13% increase in profits for the second quarter. The company thinks cash on the balance sheet will equal debt by the end of 2011. Not bad for a car company that refused to take taxpayer money to bail itself out. Earnings news was also good for MMM, which had earnings of $1.54 per share, a 37.5% increase over the second quarter in 2009.  MMM continued to grow across all its business lines and raised its 2010 earnings per share estimate.  Wells Fargo and IBM also reported earnings growth on a year over year comparison.  Compared to last week the stronger earnings releases helped push stocks up throughout the week with the Dow finishing the week up about 3.2% and the S&P up about 3.5%.  Both major indices are now close to be positive for the year again.  We have about another week or two until earnings season is done, and we will continue to report to you our readers.

Weekly Market Commentary is written by the MSF Investment Committee
*Information for this commentary was obtained from sources believed to be reliable. MarketSpace makes no assurance or guarantee regarding the information provided from outside sources.