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August 18, 2000

Watch what they say: Pay attention to the Fed's statement on Aug. 22
By Dr. Irwin Kellner, CBS.MarketWatch

Don't be so sure ... Weiss comments

NEW YORK - Don't dwell too much on what the Federal Reserve decides to do to interest rates this Tuesday -- concentrate, instead, on the statement that accompanies this decision.

If you do, you'll be better prepared for what lies ahead.

Virtually everyone, myself included, now expects the Fed to leave its key Federal funds rate unchanged at the conclusion of its Open Market Committee meeting on the Aug. 22. Prices of stocks and bonds pretty much reflect this belief.

So if you want to get a jump on the rest of the crowd, you should pay more attention to the statement that the Fed will issue along with its interest rate decision at the conclusion of its Open Market Committee meeting on the Tuesday.

This is because we are heading into the heart of the presidential election campaign, now that both major parties have selected their slates for president and vice-president.

Politics and monetary policy don't mix

And while there might have been one or two exceptions in the past, for the most part, the Fed prefers to stay out of the spotlight during political prime time. It doesn't want to be accused of politicizing the process of making monetary policy.

So unless something unexpected develops, the Fed is not likely to even consider changing interest rates until after Election Day -- even though there is a meeting of its Open Market Committee scheduled for Oct. 3.

Wall Street is under the mistaken impression that the Fed will never raise interest rates in an election year. Dr. Kellner says that there may be "one or two exceptions in the past." In fact, the Fed has raised rates in eight of the last 14 election years since World War II. Moreover, half of those election-year rate hikes occurred in the three months prior to the November ballots. Presidential election races certainly do not guarantee that the Fed will hold off on raising rates.
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