Dollars and Sense: The markets are singing 'Happy Days,' should we?

The Fed speaks. As happens periodically, all eyes were on the Federal Reserve last week. The markets have been marking time for the past few weeks, in part waiting for the Fed to meet, which it did on Tuesday and Wednesday. Specifically, traders were waiting for news of a change in the Fed policy on interest rates. The Fed gave the markets the news they hoped for: Interest rates will remain where they are—essentially 0 percent—for the foreseeable future. The exact words the Fed used were for “a considerable time.”

But what does it mean? If that sounds non-specific to you, you’re right. It was typical Fed language: pointing us in a direction, but failing to set a specific goal or destination. So what does “a considerable time” mean? The markets seem to think that means the middle of next year, at least. The Fed has said in the past that it would keep on its current course until unemployment fell below 6 percent and inflation rose above 2.5 percent. The goal is to heat up the job market without overheating inflation. The so-called “goldilocks effect”—not too hot, not too cold. Unemployment is still above 6 percent, though it has been trending down this year, and we got a consumer price index number last week that suggests inflation remains in check. In fact, on Wednesday we got a report that said consumer prices actually fell in August. Not by much—0.2 percent—but that drop certainly allayed inflation fears.

The rest of the news. In other economic news: We saw a weak report on U.S. manufacturing, as industrial production dropped for the first time in seven months. But manufacturing led us out of the recession, so a bit of a breather there is not a cause for concern. And the rest of the news was pretty good. Merger and acquisition activity remains strong, with several deals announced this week, including Microsoft’s plan to buy Mojang, the maker of the video game Minecraft, for $2.5 billion. Alibaba’s initial public offering is the largest in history. It has fueled optimism about the health of the capital markets. The National Association of Home Builders Housing Market Index for September jumped 4 points to 59. Homebuilder confidence hit the highest level in nearly nine years.

Employment up. Package delivery company UPS said it was hiring 95,000 workers for the Christmas season. And first-time claims for unemployment benefits fell significantly, to 280,000, a number we haven’t seen in years. So I wouldn’t bust out singing “Happy Days are Here Again,” but this week looked pretty good, and that drove both the Dow and the S&P 500 to new record highs.

The week ahead. It’s not a huge week for reports, but we do get a couple worth keeping an eye out for. Today, we’ll get existing home sales for August. On Thursday, we’ll get the durable goods report for August. And on Friday, we’ll get the third and final revision to second-quarter Gross Domestic Product. As you know, in the past I’ve sometimes ranked these reports on a scale of 1 to 10, with a 10 being a report that has the most impact on the markets. None of these reports are a 10, but they all fall in the 6 to 8 category. If they are unanimous in either a positive or negative direction, you can pretty well expect the markets to move that direction this week as well.