Tuesday brought the story of the dog that


bite. Instead of warning of a looming inflation threat, as some had predicted, Alan Greenspan and his minions on the

Federal Open Market Committee

virtually stood pat in their statement accompanying yet another quarter-point hike in the fed funds rate.

A warning about inflation pressures would have sent a signal that the Fed's rate-hike campaign would be a little more aggressive and a little less measured. Instead, the Fed remains on course for a continued slow-and-steady approach; reflecting the status quo Fed strategy, futures markets expect quarter-point hikes at the next few meetings into 2005.

As mentioned


The Wall Street Journal

set off some speculation with a Dec. 2 article reporting that unnamed Fed officials were growing increasingly worried about inflation. Fed officials may have been worried, but not enough to alter their assessment that "inflation and longer-term inflation expectations remain well contained."

The language in

Tuesday's release was the same as that included a month ago. The only change from November, in fact, was a modest concession to weaker job growth. Instead of saying labor markets "have improved," the Fed said "conditions continue to improve gradually." That nod to reality, after the weaker-than-expected November payrolls report, seemed designed to minimize any concerns about the labor market.

Stocks liked that outcome, and major indices posted gains amid an afternoon rally in financials and homebuilders, two sectors that would come under stress from more aggressive rate hikes.

J.P. Morgan Chase

(JPM) - Get Report

finished up 1.3% and

Toll Brothers

(TOL) - Get Report

tacked on 1%.


Dow Jones Industrial Average

closed higher by 0.4% at 10,676.45. The

S&P 500

posted a similar gain of 0.4%, to finish at 1203.38, crossing the symbolic 1200 threshold for the first time since 2001.


Nasdaq Composite

finally closed above its previous 2004 high of 2153.83 after four failed tries earlier this month. A big part of the day's 0.5% move to 2159.84 came after the Fed's announcement.


(INTC) - Get Report

gained 3% and software vendor

BEA Systems


gained 5%.

The bond market, which had declined a bit this week on fears of more aggressive tightening -- or perhaps on actual fears of greater inflation ahead -- regrouped after the FOMC announcement. The yield on the 10-year Treasury note ended at 4.13%, down from a high of 4.19% in the morning after the October trade deficit was reported at a record $55.46 billion. The opposite happened to the dollar, which had rallied a bit on hopes that more Fed hikes would make it more attractive to foreigners. The euro finished around $1.3306, up from $1.3261 earlier in the session.

No Picnic for Munis

Ahead of the Fed meeting,



James Altucher extolled the benefits of buying two closed-end funds that own high-quality municipal bonds, the


Seligman Quality Municipal fund and the


Municipal Advantage fund. Both are trading at discounts to their net asset value, as closed-end funds often do. And both sport slight discounts to their five-year average discounts.

But with Greenspan still in rate-raising mode, it doesn't seem like a timely play. All the more so because investors will likely flee municipals due to further tax cuts. In fact, it's likely that these funds will carry larger discounts to NAV than they did over the prior five years and that municipals will trail taxable bonds as well.

First, realize that the lower marginal tax rates and dividend cuts enacted by President Bush already have made municipals less appealing to the rich individuals, banks and insurance companies that make up the bulk of investors in this market. Tax-exempt mutual funds have seen investors remove almost $13 billion, or 4% of assets, so far this year on a net basis, compared with $5 billion, or less than 0.1% of assets, in net outflow for taxable bond funds.

Last year, muni funds lost 1.4% of assets while taxable bond funds gained 4.6% in net inflow. Clearly, munis are drawing less interest thanks to tax cuts. I have personally heard financial advisers recommending dividend-paying stocks as a better way to earn income in retirement that will keep up with inflation.

Remember also that people saving in retirement accounts like IRAs and 401(k)s don't own munis because they don't get any tax benefit. Also, endowments and pension funds, which are both classes of tax-exempt investors, rarely hold munis except occasionally as an arbitrage play. According to the latest Fed figures, public pension funds owned $300 million of munis among $2 trillion of assets, and the figure isn't even listed for the $4 trillion of private pension fund assets. Thus the asset allocation decisions of sophisticated institutional investors won't come into play.

The falling interest in muni bonds also can be seen in the interest rates that muni issuers have to pay relative to Uncle Sam. The most recently reported 4.63% yield on the Bond Buyer's Index of 20-year munis is 91.3% of the yield on an equivalent Treasury bond. That's up from 90.6% a year ago, meaning that muni investors are giving less value to the tax exemption and demanding more yield. And it's way up from the 88.6% ratio seen five years ago at the end of the Clinton administration.

If you buy a closed-end fund now that owns munis and the yield demands rise further because of more tax cuts, the prices of those bonds will fall to compensate. While the fund will be able to buy higher-yielding bonds in the future, the net asset value will go down first. There's no free lunch.

All that said, these two closed-end funds do trade largely in synch with overall interest rates, so if long rates fall, they will rise, and if rates decline, they will fall.

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

your feedback.