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Embracing Uncertain Fed

Blue chips continue to rally before an FOMC announcement unlikely to offer much clarity.

Most agree that Wednesday's


meeting will bring no surprises -- an unchanged fed funds rate, an accompanying statement that retains its tightening bias, and some kind of release regarding the Fed's communication methods. And despite the evolving expectations for interest rates in coming months, the markets are relatively quiet ahead of the Fed.

"People are conditioned to do nothing in front of the Fed meeting, so the market will be on hold until 2:15 p.m.

EST Wednesday," says Michael Driscoll, director of listed trading at Bear Stearns.

Stocks didn't move much Tuesday, but two out of the three major indices managed to close in the green, and the

Dow Jones Industrial Average

hit yet another new record high, closing up 0.09% to 12,127.88. The

S&P 500

added 0.03% to finish at 1377.38, while the tech-heavy

Nasdaq Composite

finished the day down 0.46% to close at 2344.84.

General Motors

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shares powered the Dow during the day, gaining 2.84% and reaching a new 52-week high in expectation of a strong earnings report Wednesday. Shares of


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(DD) - Get DuPont de Nemours, Inc. Report

also gained over 1%, the latter on strong earnings.

Earnings from companies such as




Lockheed Martin

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were also supportive of the blue-chip rally.

But weak guidance from

Texas Instruments

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weighed on the chip sector; the Philadelphia Stock Exchange Semiconductor Index lost 0.9%, holding back the Nasdaq. (After the close,

(AMZN) - Get, Inc. Report

beat expectations, and its shares were recently soaring 12% in post-close trading.)

The stock market is poised to take whatever the Fed throws at it as good news, says Barry Hyman, equity market strategist at IKN Financial.

"The market works in every scenario -- if rates go down, the market says 'soft landing', and if rates go up, the market says 'economy is strong, so profits and earnings are great'," says Hyman. He believes the stunning rally is fueled by cash being put to work from various places, including the commodities and real estate markets.

So stocks are unfailingly rising amid optimistic sentiment, while the bond market is only barely retreating from its bet that a recession is ahead. The Treasury market was quiet ahead of the Fed meeting as well. The 30-year rallied 7/32 to yield 4.94%. The 10-year added 2/32 to yield 4.82%, and the five-year ended unchanged and yielding 4.80%.

"The mixed messages from the stock and bond markets keeps me concerned about this rally," says Hyman. This concern keeps him wishing for pullbacks, or openings to buy, and he finds the best opportunities in technology and the Nasdaq, although that index and sector have lagged year-to-date and again on Tuesday.

How Slow Can You Go?

Mixed messages are exactly what the FOMC wants to avoid. This week's meeting was changed from a one to two-day session because it will address the Fed's communication with the markets as well as monetary policy.

The irony is that any statement on communication comes a day after


reported on the Fed's leaked "greenbook" for the September meeting.

The "inside baseball" version of the beige book is passed to FOMC members a few days before each policy meeting. September's book repeated what the also-leaked greenbook from August pointed out, according to


: Fed forecasters are once again adjusting their threshold for how slow the economy must go to reduce inflation. The revelation, which caused a mostly overseas Treasury selloff Monday, highlights the subtle evolution of the market's expectations since the start of the month from rate cut to fears of hawkish warnings of rate hikes.

First there was FOMC vice chairman Donald Kohn slapping the bond market's wrist about its "certainty" regarding monetary policy (read: rate cuts). Then there was the repetition of that message by several Fed speakers, and the beige book, which revealed the Fed's concern that the economy wasn't slowing as quickly as expected. The September FOMC minutes also reiterated that inflation is still a chief concern for the Fed.

In that time frame, the fed funds futures market has gone from expecting rate cuts, to steadily increasing the odds of a rate hike sometime next year. The fed funds futures market now prices in a 6% odds of a hike at the December meeting, and 16% odds of a hike at the January meeting, up from 6% Friday, according to Miller Tabak. For all of 2007, the futures market prices in just one 25-basis-point rate cut, down from three earlier this month.

Despite the Fed's heralded desire for more transparency, its messages clarify nothing. The Fedspeak, the Greenbook and the beige book remind the markets that the Fed is uncertain about the future of rate policy, and that the market should be also. We're still in a "data-dependent" world after all. Stocks have chosen to erect a wall of gains against the Fed's uncertainty while bonds are being whipsawed lately by the constant questioning.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


to send her an email.