Triple Witching Week – Three Economic Issues Meet in Washington DC

Tuesday, January 26, 2010

01-26 369936_washington_dc_on_the_map_1Forget Wall Street and Main Street. This week, it’s Washington DC and the US economy. Tomorrow night, President Obama’s State of the Union address. Tomorrow afternoon, the Federal Reserve’s Open Market Committee (FOMC) decision about interest rates. By week’s end (probably), the Senate’s vote on Ben Bernanke’s reappointment as Federal Reserve Board chairman.

Mixed signals are everywhere, so the final results will be interesting and should be enlightening. We can watch – dispassionately – what’s said and what happens. The outcome could impact the economy down the road, so our investment strategies may be affected.

The confluence of these three events is unusual. So are the accompanying strong political currents. Here are my thoughts regarding each of the items.

State of the Union Address

To me, there are two routes that President Obama could take.

One is the “leading indicator” approach, focusing on the broad improvements that started last March and are now becoming more visible and widespread. His message then would be to reassure that improvements are on course, past actions are proving appropriate and the government is busy at work now establishing the necessary safeguards to prevent such problems from recurring.

The other is the “lagging indicator” approach, focusing on the still-weak, late-blooming items such as employment and lending. Here, the message would be on the work yet to be done and the necessity of continuing government stimulus and support programs.

FOMC Statement

I’ve written previously about the need to let the Federal Funds rate rise to a more normal level. However, the FOMC will likely keep it near zero, even if it feels that now is the time. Raising the rate this week would likely cause an uproar in Congress, negatively affecting Ben Bernanke’s reappointment vote, and bolstering the drive to shrink the Federal Reserve’s responsibilities, authority and independence.

Ben Bernanke’s Reappointment Vote

Two clichés probably give us the vote results:

Don’t rock the boat

Better the devil you know than the devil you don’t

Therefore,  the Senate will likely approve his reappointment.

As far as the effect on our investment strategy, we can wait until the smoke has cleared from this triple witching week.

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