Now for a Fed meeting that's completely different.
For the first time in months, the markets are viewing a Fed meeting bereft of hope that, should the Fed raise rates, it will be one and done.
Nor might the Fed be done if it raises rates again in March.
Or even if the Fed pulls a surprise and ups the funds rate by 50 basis points (rather than the 25 basis points that 30 of 30 primary dealers are expecting), it
might not be finished hiking the funds rate.
Speeches by Fed officials in the last few months seem to indicate the committee's desire to let a little air out of the economy during the first half of the year, or depending on your vantage point, conduct an assault on economic growth.
The tough-talking approach has the markets scared -- witness the hemorrhaging in the major stock indices in the last couple of weeks -- though minority opinions persist that the Fed might be better off raising by 50 basis points.
That's unlikely to happen. It's as yet unclear whether an excess of inventory-building and other spending inflated economic growth in the months prior to Y2K. All that said, most believe the Fed is likely to take the gradual approach at this meeting, which opens today and concludes on Wednesday, by raising the fed funds target by 25 basis points to 5.75%.
"The data can be heavily revised. They'll do this gradually, rather than in big dramatic steps. It's easier to reverse that process, there's less of a dramatic effect and it minimizes the chances of making a serious policy mistake," said Suzanne Rizzo, economist at
. "If they wanted to tighten by 50,
is perfectly capable of letting the market know that."
The Fed's balancing act isn't an easy one right now. The stock market -- at least until the last two weeks -- has stubbornly flown ahead despite rising interest rates; consumers continue to spend, and the economy has grown with only faint signs of inflation (energy prices excepted). Meanwhile, the Fed is stuck looking at models that tell it only that the rate of growth can't be sustained with a 4.1% unemployment rate without causing some wage pressures, which are only starting to increase, according to the most recent
Employment Cost Index
Fed Chairman Greenspan, in a provocative and harsh
speech Jan. 13, admitted that he doubts the relevance of popular inflation-forecasting models, having witnessed productivity rise and inflation remain dormant in the last few years.
But Fed officials believe the 4% pace of growth cannot be sustained with labor markets this tight. It isn't causing a problem now, but it's going to cause a problem, goes their thinking.
That means cutting into consumer spending demand. However, recent studies -- including the Fed's 1998
survey of consumer finances -- show that Americans, more than ever, are tying their fortunes to overall, broad-based gains in the stock market. In 1998, nearly 49% of families owned stock, compared with just over 40% in 1995 and 31.6% in 1989.
"The same percentage change in the stock market has a billion-dollar impact on your wealth and a bigger impact on consumption than 10 years ago," said Ethan Harris, economist at
. "That means that, for the Fed, which used to not worry about the stock market, it has become as important as interest rates and other major variables."
But that means a round of rate hikes, that could end in June, or later, puts the Fed in the unenviable position of attacking stock-market gains, something that it's noticeably averse to doing. Not wanting to take a big bite out of the market (already taking a big bite out of itself due to these fears), the Fed seems more likely to stick with a 25-basis-point hike and ready itself to raise rates again in another month.
A 'Developing' Scenario
Greenspan let the market in on this approach in his Jan. 13 speech, when he stated that "what will stop the wealth-induced excess of demand over productivity-expanded supply is largely developments in financial markets."
That is, higher interest rates -- something the Fed expects to slow the economy.
However, the other "development in financial markets" would be an equity correction. It's unclear yet whether the recent slide is simply a near-term, Fed-driven shock or if the market is finally taking a longer-term, fundamental view that higher interest rates will cut into corporate profits and drive down demand. The Fed wants to see a little of this -- to avoid full-fledged inflation or an all-out recession.
Despite the stock market's increased importance, the economy has too much momentum to screech to halt. That doesn't mean, however, that the Fed's stair-stepping approach to rate hikes won't make the market feel like it's being thrown down a flight of stairs in the coming months.