The Coming Week: Broken Vow
Federal Reserve Chairman Alan Greenspan will begin waving goodbye to financial markets this Tuesday by raising official interest rates by a quarter point for the 13th straight time. What Greenspan says during his farewell will help determine whether it's a fond one.
Arguably, Tuesday's meeting of the Federal Open Market Committee is as eagerly awaited as any Fed meeting this year. That's because investors want to see if the FOMC drops its longstanding language to tighten monetary policy at a "measured pace."
"We're seeing a 50-50 chance that there could be some change in the language," said Arthur Hogan, chief market analyst with Jefferies. "That means we're getting close to the end, and the market can breathe a bit easier."
Hogan believes the Fed should pause when its overnight lending rate reaches 4.5% (this week's hike will bring it to 4.25%). He said the Fed tends to overshoot on rate-tightening because of the lag time before higher interest rates show up in economic data.There have been few sings of stasis in recent economic data. Third-quarter GDP growth was measured at a robust 4.3%, and the economy added 215,000 nonfarm payrolls in November, beating Wall Street's estimates. Meanwhile, inflation gauges were tame. Hogan predicted the Fed will probably stop raising rates at 5%. "We've got a new chairman coming onto the job who will probably keep tightening for a few months to show his inflation mettle," Hogan said, referring to President Bush's appointee for the job, former Fed governor Ben Bernanke. No change in the Fed's message next week could keep the market in check for the rest of the year after a strong rally in November. "I have no concern about a significant pullback, but the cross-currents of the end of this year will probably keep a lid on things after we got so aggressive in November," said Barry Hyman, equity market strategist with Ehrenkrantz King Nussbaum.
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