Sterling Weekly for August 15th, 2005

Well, the major news last week came down to two basic items, interest rates and the price of oil. I was originally going to discuss the price of oil and where I think it is going in this week's edition of the Sterling Weekly, however I could not find a satisfactory chart from which I could get the necessary price data; I'll try to find one this week and discuss my outlook on oil in next week's newsletter. In the meantime I would like to point out that in the March 7th edition of this newsletter I wrote that the price of oil would go to $64-$69/barrel, a price level it reached last week. I think we might see a round of profit taking and a pull back in the price of oil in the near future, but where it goes from their remains to be seen.

Last week the Federal Open Market Committee meet and raised short term interest rates. The big debate relating to interest rates is when the Fed will stop raising interest rates. Well my expectations are that the Fed will keep raising interest rates until the Fed Funds Rate is between 4.0-4.5%, which means that the Fed will raise rates another 1.0-1.25%. The Fed meets every six weeks, so that means the Fed will finally be done raising interest rates in 24-30 weeks, basically sometime between December and February. My reasoning for this is very simple, historically the Fed Funds Rate has been approximately 1.25% above the rate of inflation, which is currently about 3.0%, you can do the rest of the math.