Traders are bracing themselves for another tidal wave of earnings in the coming week, but some say it is the Fed that could really soak investors if it maintains its tough talk on interest rates.
"If the market continues to rally into the FOMC meeting and the Fed keeps up its aggressive stance on rates, then you could see a lot of profit-taking," says Al Goldman, chief market strategist at AG Edwards.
The Fed will make its policy statement on Tuesday at 2:15 p.m. EST, in the last meeting overseen by Alan Greenspan as chairman. Greenspan, who will be replaced in the top spot by Ben Bernanke, is expected to bless the Fed's 14th straight quarter-point hike in the benchmark fed funds rate, bringing it up to 4.5%.
Analysts were fairly confident that the Fed would maintain its tightening bias through its March meeting. However, after Friday's lower-than-expected gross domestic product number, the odds that the Fed will hike rates dropped sharply.The initial GDP reading showed annualized growth of just 1.1%. The government's main gauge of broad economic output was expected to rise by 2.8% in the quarter, after jumping 4.1% in July through September. After the report, fed funds futures showed the odds of a quarter-point hike at that meeting falling to 60% from 76%, according to Miller Tabak data. "With lower-than-expected growth, it makes the job a lot easier for the Fed -- especially with its two new Bush-appointed members -- to pause from its rate-hiking plan," says Paul Mendelsohn, strategist at Windham Financial. The Fed policy statement won't be the only big announcement of the day. President Bush will be delivering his State of the Union address on Tuesday night, and analysts say it could have severe market implications. The speech could especially affect energy shares, depending on what Bush says about his plans to address Iran's nuclear ambition. Oil has climbed in recent weeks to nearly $70 a barrel as tensions over Iran have increased.