midweek meeting cast a shadow over the market Tuesday, stymieing investors as they groped for consensus about the future of rate policy.
Everyone is looking for the Federal Open Market Committee to announce a quarter-point increase tomorrow. What happens next is still up in the air, although recent data and market moves are piling up on the side of more hikes sooner rather than later. Fewer hikes help consumer spending, home prices and the profitability of banks. More hikes spells trouble for all three.
On Tuesday, there wasn't much conviction about rates or other topics and the major indexes were practically unchanged on light volume. The
Dow Jones Industrial Average
lost 5 points to 10,386.37, the
was about unchanged at 1164.08 and the
added 4 points to 2043.33. Bonds slipped a bit as the yield on the 10-year Treasury rose to almost 4.22%. Crude oil fell $1.72 to $47.37 a barrel, the lowest close since September.
Retailers had a bad day after
May Department Stores
reported an 83% drop in third quarter earnings and a 3% drop in same-store sales. A Deutsche Bank note on the weak state of the consumer didn't help, nor did a weekly chain store sales report showing a modest 1.3% uptick. May lost 0.6% to $26.88.
Homebuilders experienced a decent rally on the back of strong results from
. The luxury-home builder said third-quarter revenue was up 62%, new orders rose 33% and the value of the company's backlog increased 71%. And while some companies have used land sales to make their numbers, Toll sold only $1.7 million of land in the quarter, down from $6.4 million last year. Toll gained 3% to $50.63.
The rally was a little strange because Toll already had noted how great the quarter was several times. Meanwhile, home-price appreciation has slowed or reversed in all its markets and interest rates are really only kicking up now. But until more evidence accumulates that the end of the real estate boom is at hand, the bulls keep on buying.
Don't expect such a quiet day on Wednesday. The last two Fed meetings have occasioned strong stock market rallies. In August, the rally gathered steam through the close as investors cheered the Fed's view that the economy was in good shape. In September, the rally fizzled when a portion of the Fed's statement was read as hints of a weakened economic outlook.
There are unlikely to be many signs of weakness in Wednesday's statement, although stocks have had a big postelection boost, so there may not be as much oomph after the news is released this time around. In addition to the Fed, the Energy Department could move oil prices and stocks when it releases oil inventory data Wednesday morning.
Fed chatter has indicated some flexibility of late, which had been helping bonds to rally. Much was read into concluding remarks by Fed Vice Chairman Roger Ferguson, for example, two weeks ago when he spoke about the need for the central bank to raise its benchmark rate to a more neutral level. The question for the Fed is finding the correct rate, after taking inflation into account, that will allow the economy to continue growing, or what Ferguson refers to as the "equilibrium real federal funds rate."
In theory, with the fed funds rate at 1.75% and inflation at about 2%, the real rate is not only below equilibrium but is negative, a surefire recipe for overheating if allowed to linger. Thus, the Fed's "measured" campaign to bring the rate up. Economists have in the past pegged the equilibrium rate at double its current level, implying a lot more tightening should be expected.
To support the bond market's wild recent rally, bulls have sought to deflate the notion that the Fed was seeking equilibrium. And they pointed to Ferguson's Oct. 29 remark that it was "very important that the FOMC not go on a forced march to some point estimate of the equilibrium real federal funds rate."
"In my judgment, we should remove the current degree of accommodation at a pace that is importantly determined by incoming data and a changed outlook," he added.
The argument backfired on Friday, however, when the stronger-than-expected payrolls report showed that 337,000 jobs were created in October and that incoming data could be bad for bond bulls. Now the markets not only anticipate a quarter-point hike on Wednesday, but also a similar move next month.
Scott Brown, chief economist at Raymond James, is dismissive of all the analysis of a neutral fed funds rate. Look to the data and there's plenty to support the notion that rates are going up and up, he writes.
"Fed officials have been clear. Future policy moves will be dictated by the economic data," Brown says. Rates "are certainly headed higher in the near term."
Another reason the Fed ought to stay on its toes is inflation. After all, the Fed doesn't raise rates to cool the economy because a growing economy is bad. Rather, it does so to prevent the economy from overheating and crashing. Incipient inflation is a sign of overheating.
was the latest in a long line of manufacturers to reveal price increases because of higher materials and energy costs. CEO Ralph Hake said the appliance maker had done as much expense-cutting as it could to offset the higher costs. Maytag skied 9% to $20.27.
"These efforts cannot keep up with the escalating cost increases the industry is experiencing, making price increases necessary," he said. Buy your new washing machine quick -- prices go up 5% to 8% on Jan. 3.
In keeping with TSC's editorial policy, Pressman doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send