In the coming week, you will likely hear a lot of debate about whether the Federal Open Market Committee will hike rates by a quarter- or a half-point at its May 16 meeting.
One economist will get in up front of the camera and say 50 basis points, another strategist will say 25, a trader will murmur about the rumors of 75. It will all be great fun, and it's a shame to go and spoil the party before it's even started, but here goes: It is a near certainty that the FOMC will raise rates by a half-point, and to pretend that it won't borders on the ridiculous.
Don't believe it? The
fed funds futures, a very good indicator of where rates are going, have factored in an 82% chance of a half-point hike. Still don't believe it? In a poll on Friday, economists at 26 of the 29 primary dealers said they expected a 50-basis-point hike. There's never been a case when the FOMC has gone against the expectation of such an overwhelming majority.
"You have very strong demand, and the
Fed is going to do what's necessary to slow things down," said Mitchell Held, economist at
Salomon Smith Barney
. Held and his colleagues upped their rate-hike expectations to a half-point on Friday, in the wake of a week of strong economic data, and they now expect the fed funds target rate to reach 7.5% before
Greenspan & Co. are finished. (It's at 6% now.) This runs counter to an idea making the rounds in the stock market that the Fed will finish up hiking rates by July and then put on the brakes until after the presidential election.
"Oh, baloney!" is how Held reacted to this notion. "Greenspan has raised rates in election years. He raised on the eve of a Republican convention even when everyone thought he was a card-carrying, dyed-in-the-wool member of the party."
It should be noted that the Solly economists are some of the more hawkish on the Street; most of the dismal scientists don't think there will be anything as severe as another 150 basis points added to the
fed funds rate. But it's also hard to say with confidence
the FOMC is going to stop hiking, at what point the economy will slow to a point where the Fed governors feel that the inflation threat has been headed off. And that puts the stock market in a bit of a bind.
"The market has the same problem it had when the correction started," said Christine Callies, U.S. investment strategist at
Credit Suisse First Boston
. "Fed policy is putting pressure on market multiples. Until the Fed is satisfied that the economy has slowed below its speed limit, there just isn't going be much room for multiple expansion."
Callies reckons that this means that while stocks may be volatile on a day-to-day basis, they will remain bound in a pretty tight range. The market's giving some traders a similar message.
"I think it's going to be very slow going forward," said Kenneth Sheinberg, head of listed trading at
. "The volume is going to dry up. You're just going to have this very boring market that I think probably ends up drifting lower."
It's the kind of environment, says Sheinberg, where investors will continue to sell into rallies, raising funds for more certain times. Which is a course of action he pretty much agrees with. "I'm still rather nervous on the market," he said. "I think that people just have to be very, very cautious."
It is also, thinks Callies, an environment in which highly valued stocks will struggle, and investors are better off looking for solid growth outside of technology.
"Tech never had a monopoly on good growth," she said. "You can find a lot of companies that are not very different from tech, and the market is treating these things like growth is going to slow to nothing or that a recession is around the corner."
There are a couple of big economic reports due out in the coming week --
on Thursday and the
Producer Price Index
on Friday -- and there might be some people who are hoping that they will somehow come in weak and that that will somehow stay the Fed's hand.
That's pretty wishful thinking, thinks Salomon's Held: Just as two years ago the occasional strong economic report was thought of as an anomaly, now a weak report will be treated that way. Maybe the one thing in his estimation that would make the Fed ease back would be a big correction in the stock market.
Nobody wants that.