Issue 17 - July 1, 2004

2004 Second Half Outlook

The Fed Finally Acts:
The Federal Reserve raised their benchmark rate by 25 basis points to 1.25%. This was their first move in one year and marks the first increase in the Fed Funds rate in over four years. It is interesting to consider what a difference a year makes. In June
of last year the Fed was actually lowering this rate to 1% on continuing fears of a weak economy and deflation.

Does the Fed’s action herald only bad news or are there kernels of good news as well? The answer is probably a little of both. As the chart below shows, the Fed has necessarily provided enormous liquidity to support the US economy through an unprecedented period of challenges including market bubbles, terrorism, and recession.

For the optimists among us, the move confirms the fact that the economy is on sufficiently healthy footing to warrant a return to normalized interest rates.
Pessimists will point to the drag that higher rates will put on the economy. We
would suggest that a car has both a brake and an accelerator for a reason. While the Fed has been quite deliberate in their steps toward higher rates, the bond market has already taken preemptive steps toward a higher rate environment. The Treasury market rate environment is now consistent with an economy growing at 4%.

The Road Ahead:
While the Fed has now embarked on a path to higher rates, a Federal Funds rate of 1.25% could hardly be deemed restrictive. There remain four meetings before year
end and if the Committee were to stick to the “measured” approach, it should be reasonable to expect them to add back in a quarter point at each opportunity. That would put the benchmark rate at 2.25% by year end. This would still be considered extremely accommodative (relative to an economy growing at 4%), but this at least gets the Fed into a position to truly tap on the brakes if required in 2005.
Global events and our own presidential election will undoubtedly dominate the headlines, but these should not completely overwhelm the benefits from good corporate productivity and earnings. We do not view the recent increases in
inflation as the dawn of a new multi decade cycle. Rather, a return to modest
inflation was a major goal of the Fed and is the direct result of the ultra accommodative policy of these past two years. These coming months will not necessarily be easy for the markets, but that does not preclude the possibility of individual companies and securities performing well. Further, this period should provide some additional opportunities for purchases of bonds that had been too expensive in the recent past.



In this Edition

  • 2004 Second Half

Huntington Steele

925 4th Avenue
Suite 3700
Seattle, WA 98104



Past Issues

16 - 06.01.04
Big Bad Fed

15 -05.04.04
Rising Rates/ Google IPO

14 -04.01.04
First Quarter 2004

13 - 03.02.04
2004: Encore Performance

12 - 02.03.04
Market Outlook/Cell phones

11 - 12.16.03
Auctions - eBay, US Treasury, IPOs

10- 12.02.03
Recent Economic Data
Market Implications

More Past Issues
can be found in our

Newsletter Archive


Market Highlights

  6/30/04 3/31/04 12/31/03 12/31/02
DJIA US 10435.5 10357.7 10453.9 8341.63
S&P 500 US 1140.84 1126.21 1111.92 879.82
Nasdaq US 2047.79 1994.22 2003.39 1335.51
EAFE Int'l Equity 1327.97 1337.07 1288.77 952.65
5 Yr Treasury 3.818 2.89 3.231 2.74
5 Yr AAA Muni 3.150 2.38 2.45 2.59
10 Yr Treasury 4.636 3.874 4.225 3.82
10 Yr AAA Muni 4.020 3.49 3.6 3.72
30 Yr Treasury 5.166 4.69 5.01 4.77
30 Yr AAA Muni 4.93 4.51 4.54 4.69
EUR Currency 1.2157 1.2227 1.2612 1.0488
JPY Currency 108.88


106.92 118.69
If you would prefer not to receive future newsletters, or if you've changed your email address, please click here or send mail to