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As expected a divided Federal Reserve left its policy rate unchanged for a sixth straight meeting, saying it would wait for more evidence of progress toward it goals, while projecting that increase is still likely by year end.

The Committee “judges that the case for an increase in the federal funds rate has strengthened but decided for the time being, to wait for further evidence of continued progress toward its objectives.”  The Fed further stated the “near term risks to the economic outlook appear roughly balanced.”

The decision extends the run of the Federal Reserve of getting cold feet from abroad and inconsistent signs of economic strength and focus will now shift to December given the proximity of the election to the early November meeting.

Three officials, the most since December 2014, dissented. .  I think it is positive the Committee does not suffer from “Group Think,” a complaint leveled about past Committees.   Fourteen of the seventeen Fed officials saw a hike by year end.

Equities initially rallied off the news but lost momentum as most recognized the status quo remains than advanced about 1% as the Fed lowered its long term interest rate outlook.

Speaking of rallying, crude advanced over 3% as oil inventories declined for the third consecutive week, falling to the lowest levels since February.  Analysts again had forecasted a gain, expecting an increase of 3.25 million barrels but inventories fell by 7.5 million.  Has the supply/demand dynamics changed?

The oil narrative is very bearish with many again discounting this week’s data, perhaps the result of all, similar to that of monetary policy assumptions, missed the biggest oil implosion in at least a generation.

As noted many times, infrastructure spending outside of OPEC has dropped by a record $450 billion in less than two years.  The seven “oil majors” replaced only 67% of oil used in 2015 and about 58% of oil consumed during the first six months of 2016.

Similar to monetary policy, infrastructure cuts take time to impact production.  Unfortunately only history will answer the question if the proverbial tide has definitively turned for crude.

The constant in life is change.  However many today bloviating the status quo will remain forever in the financial markets where past performance is indicative of future performance.  Simplistic terms such as reversion to the mean and relative value as compared to the market have all but been forgotten in this constant drive to make investing passive.

If it were only this easy.

Last night the foreign markets were up. London was up 1.36%,  Paris up 2.23% and Frankfurt up 2.11%.  China was  up 0.54%, Japan up 1.91%and Hang Sang up 0.38%.

The Dow should open moderately higher on Central Bank optimism. The dollar fell and oil is up another 2%.  The 10-year is unchanged.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.