The view from the Fed: better all the time

The Federal Reserve Open Market Committee (FOMC) concluded its regular meeting today with a fairly positive outlook. Although the FOMC press release admits that "economic activity is likely to remain weak for a time", it notes that the economy appears to have strengthened since the FOMC's August meeting.

The FOMC's statement takes note of some obvious points of concern, including:

  • Ongoing job losses

  • Sluggish income growth

  • Lower housing wealth

  • Tight credit

But the FOMC also noted:

  • Financial conditions are improving
  • Household spending is stabilizing
  • Housing sector activity has picked up
  • Longer-term inflation expectations are stable

The bottom line is that the Fed appears to be optimistic about the economy's prospects, though it will continue to monitor progress. Inflation is not a concern--at least for now.

Our view

Our outlook is consistent with the Federal Reserve. It is very likely that the recession is over, but the economic recovery will likely be subdued. Corporate profits, on the other hand, are likely to surprise on the upside. The rapid and severe cuts in corporate costs will magnify corporate profitability as the recovery leads to higher revenues. Investors will probably get tested with a decline in equity values as we move closer to year-end, but don't let that shake your confidence. Your ability to stay disciplined will make any market correction a great opportunity to re-balance into a higher equity allocation.