The Fed's Wish List

Never Say Never

SAN FRANCISCO -- Although some attributed

today's setback by blue-chip stocks and bonds to worries about the

Fed

gathering Tuesday, almost nobody on Wall Street seems overly concerned. The overwhelming consensus is the Federal Reserve will not change rates so close to Y2K and the only thing anyone seems remotely concerned about is the possibility the

Federal Open Market Committee

will adopt a tightening bias.

Still, "if I were an FOMC member coming in from outer space and didn't know what day of the year it was and just looked at the economic data, I'd be raising rates," said Mitchell Held, a

Salomon Smith Barney

economist. "The numbers look awfully strong

and February is a long way away."

Held does not believe any Fed governor is of extraterrestrial origin or that the Fed will raise interest rates tomorrow (I agree on both counts, but check the poll below regarding the former). But he makes a compelling case for why the Fed might consider tightening now, or at least should.

"Our best guess is there's no change, but it would take a lot of pain out of the way if they did it tomorrow," Held said. "It would be interesting if they did it." (Now there's a classic understatement.)

The economist noted the potential inflationary implications of heavy consumer spending, the possibility of a second-straight quarter of

GDP

growth at or near 5%, tight labor markets, certain components of last week's

CPI

report, and rising disposable income. In addition, "cash is coming out of ATMs left and right because of the end of the world," he said, echoing the concern of several market watchers -- notably Jim Bianco of

Bianco Research

-- who have theorized that money

isn't

going back into the bank post-Y2K (assuming the world continues).

In addition, "the equity market up until today was booming," Held said, speaking obviously of the

Dow

and

S&P 500

vs. the

Nasdaq

, which continued its unabated boom.

The implications of rising asset prices was also a concern of Michael Shamosh, senior fixed-income strategist at

Tucker Anthony

, who also sees the Fed standing pat tomorrow.

"What happens tomorrow is less relevant than the larger picture," Shamosh said, recommending investors "be diversified" instead of trying to gauge the Fed's short-term actions.

"The inflation is all in the equity market," he said. "People have been throwing money at the stock market. Stocks with no earnings are trading on a multiple of sales. Why anyone thinks that's anything but inflation is beyond me."

Alan Greenspan

and his minions have been much more vocal about the impact of higher equity prices in recent memory, the Fed watcher recalled, even if many investors seem to suffer from amnesia on the subject. Those who forget, or put too much faith in the Fed as the market's savior, do so at their peril, he warned.

"There's a battle between the equity market and the Fed in some respects and I'm not sure that's one the equity market is going to win," Shamosh said. "I would not expect them to do much tomorrow but probably sooner than later -- if they don't get what they want from Y2K -- I expect them to squeeze

the market slowly. The Fed will move in little steps but it will get what it wants."

Even more than its two front teeth, what the Fed wants for Christmas (and beyond) is for the speculative action in the stock market to cool down.

Shameless Horn-Tooting

As I foretold

Thursday, the

Chicago Mercantile Exchange

today announced a one-day change to its closing procedures because of Y2K concerns.

On Dec. 31, the futures and options markets will close five minutes after the cash market closes at 1 p.m. EST vs. the usual 15-minute spread.

Also, "daily settlement prices for domestic stock index futures and options will be determined on the basis of their 'fair value' relative to the underlying cash index at the close of trading" in New York, the CME said in a

press release.

Fair value represents a level at which futures theoretically should be priced in relation to their underlying cash index, minus transaction costs. However, the futures don't necessarily trade at those levels.

By giving "control" of fair value to the cash market, Harry Schiller, editor of the

Short-Term Consensus Hotline

, speculated the changes are designed to prevent "a handful of traders from jerking

the futures market around at the close and panicking everybody." It is "sobering" to know the cash market won't be down Jan. 3 because of some shenanigans in the futures market on Dec. 31, he said. "It provides calm to what could be a jittery moment."

As for the CME, it said "the special settlement procedure is being implemented in response to the confluence of special circumstances surrounding the stock market close on Dec. 31."

To which I can only say (with all respect to

The Church Lady), isn't that special?

Top Reason Why Alan Greenspan

May

Be From Outer Space

Greenspeak.

Reads economic reports in the tub.

Still plays tennis.

Thinks (tech) stock investors are irrational.

Evokes both fear and awe-inspiring reverence.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at

taskmaster@thestreet.com .