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The Two Day FOMC Meeting Commences Today.

The two day FOMC meeting commences today.  It is widely expected the FOMC will announce a complete halt to its monthly asset purchases with holdings peaking at $4.3 trillion.  Since 2009, the Fed’s balance sheet has ballooned over 700%.  Will the Committee comment about the recent uptick in bank lending where perhaps some of these funds are being utilized in a more efficient manner?

As noted last week, Federal Reserve data indicate bank loans remain at a six year high in September and the amount outstanding finally has exceeded the pre-crisis peak.  The data clearly indicates a pick up has occurred in every category of loans and is suggesting third quarter nominal GDP to be robust, perhaps with a “four handle.”

Third quarter GDP is released on Thursday, data that will be known and discussed at the meeting.

Historically 3.5% to 4% real GDP  (includes inflation) is regarded as the point where the economy has finally reached “escape velocity” or that elusive point where growth is self-sustaining.

However to most growth will not feel this robust given the absence of inflation by the accepted inflationary statistics.  Growth is “pure” not skewed by pricing pressures.

Perhaps the 1.7% or $22 average increase in 2015 social security payments is an example.   2014 social security payments rose by 1.5%.  The last meaningful increase was 2009’s 5.8% increase.  There was no increase in 2010 or 2011 and a 3.6% jump in 2012.

CPI and wage inflation are interconnected and both are instrumental in determining any increase in social security payments.  If inflation is benign via the accepted benchmark statistics, why should there be an increase in social security payments?

Relating back to escape velocity or the inflection point where the economy is self-sustaining and a change in monetary policy historically occurs, 4% real GDP may not feel like 4% real GDP given the dearth of pricing pressures.

Commenting upon yesterday’s market activity, all markets were quiet waiting for the Fed meeting, more earning announcements, with much attention focused upon Ebola.

Last night the foreign markets were up.  London was up 0.50%, Paris up 0.51% and Frankfurt up 1.49%.  Japan was down 0.38% and Hang Sang up 1.63%.

The Dow should open considerably higher on earning and economic optimism.  The 10-year is off 5/32 to yield 2.29%.

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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.