The 140-point surge of the Dow Jones Industrials -- with commensurate gains in the NASDAQ and the S&P500 -- is being attributed to the Fed`s decision to hold the funds rate at 1%. Considering the fact that every one of the 95 analysts surveyed by Bloomberg expected no change in Fed policy, it is most improbable that the surge was in any significant way connected to the non-event. Far more likely as the cause was the 24-to-15 vote in the House Ways & Means Committee to pass (with only a few minor changes) the chairman`s mark on the bill to replace the Foreign Sales Corporation. As we have been pointing out for months, the legislation designed by Chairman Bill Thomas packs a real supply-side punch in its myriad changes to the tax code affecting all commerce, domestic as well as international. The news media is downplaying the importance of what happened yesterday by pointing to the Senate`s opposition to the Thomas bill, which would "cost" the Treasury another $59 billion in revenue losses over the next 10 years. The fact is that there are so many positive changes in the Thomas version that a conference with the Senate bill will almost certainly produce a final version that will be hard for Senate Democrats to resist.
The "tax holiday" for the $400 billion in profits held overseas by US multinationals is not in the Thomas bill, but it is in the Senate version, which clearly indicates Thomas planned it that way so he could "accede" to the Senate on that point in exchange for their accessions to his bill that will pass the House as is. I don`t have the final, final version of the Thomas bill as it passed committee yesterday, but because there were so few amendments to the draft, which you can find at www.house.gov/jct/x-94-03.pdf, you can use that as a general guide to the legislation that will be shaped in conference. The White House says the President prefers the Senate version because it does not show an increase in the deficit, but privately the economic team prefers the Thomas bill because it does advance prospects for the economy in 2004. There is a companion link to the Joint Tax Committee`s estimates of the static "costs" of the Thomas bill can be found at www.house.gov/jct/x-95-03.pdf.
As the legislation progresses in a manner that produces positive results and is signed by the President sometime in November, it could easily push the DJIA over 10,000 by year`s end. If you have Tuesday`s Wall Street Journal, take a look at "Supply-Side Trap for the Democrats, which mentions my 30-year-old "Two Santa Claus Theory." This is another reason to expect the final version of the FSC legislation having more Democrats on board than the leadership has expected.
MD Fed Brief
We didn`t expect a change in the Fed`s policy rate yesterday, but we hoped for some indication that the Fed had begun to track market-based indicators of price-level risk. No such luck. The FOMC`s policy statement was a total disappointment in that it simply reiterated the increasingly obsolete fear that the risk of an unwelcome fall in statistical inflation outweighs that of a pickup. Forward-looking measures of price level risk -- gold, the CRB and the dollar`s forex value -- suggest precisely the opposite.
At this point, we think it is much more important for the Fed to begin shaping expectations around a stated desire for stability in the dollar unit account. Nothing would be more helpful in this respect than if Fed Chairman Alan Greenspan were to once again verbally acknowledge the gold signal which successfully guided his policy decisions for the first decade of his tenure. This would help to unwind some of the risk created by the Treasury`s clumsy shift away from the Clinton/Rubin "strong dollar policy." The strong dollar policy clearly had come to outlive its usefulness, but jettisoning it should have been done in the context of dollar stability instead of bashing China and Japan to deflate. As we noted yesterday, there is not one member of the FOMC that has said anything to indicate that the Fed is even remotely concerned that the dollar fall could go too far. This is troubling.
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