Updated from 1:15 p.m. EDTBond prices rose for the second day in a row and the dollar briefly shot higher after Federal Reserve Vice Chairman Roger Ferguson indicated that surging energy costs will cut into economic growth but won't stop the Fed from hiking rates. Stocks, meanwhile, seemed to look past the Fed jawboning and were recently higher after overcoming early weakness. By early afternoon Wednesday, a slew of other Fed speakers -- Fed Governor Donald Kohn, Cleveland Fed President Sandra Pianalto, New York Fed President Tim Geithner and Dallas Fed President Richard Fisher -- all confirmed that interest rates need to go higher. "Obviously, we are considerably closer to where policy needs to be than we were sixteen months ago, but we are not yet at a point where we can stop and watch the economy evolve for a while," Kohn said. Pianalto, who is not a voting member of the Federal Open Market Committee, added: "Removing the policy accommodation puts us in the strongest possible position to react as evolving economic conditions require." The comments followed those made Monday evening by Fed Chairman Alan Greenspan and by San Francisco Fed President Janet Yellen on Tuesday. Despite the steady drumbeat of Fed hawkishness, major averages rebounded from early weakness. Investors apparently digested disappointing guidance from tech bellwether Intel ( INTC) Tuesday after the close. Even Intel, which fell as much as 4% in morning trade, was recently down only 0.15, or 0.64%, at $23.57. After trading as low as 10,232.98 early in the day, the Dow Jones Industrial Average was recently up 63.08 points, or 0.61% at 10,348.34. Strength in Altria ( MO) and Johnson & Johnson ( JNJ) was helping offset weakness in components Intel and Honeywell ( HON), whose earnings guidance also disappointed. The S&P 500 was recently up 8.51 points, or 0.72%, at 1186.65 vs. its morning low of 1,170.85. The Nasdaq Composite was up 19.3 points, or 0.94%, at 2075.30 vs. its intraday low of 2,042.03.
Speaking Tuesday evening, Ferguson said the Fed has been using econometrics simulation to determine how surging energy prices have been affecting, and likely will impact, growth. "We estimate that real GDP growth was held down one-half percentage point in 2004 and one percentage point this year relative to what it otherwise would have been," Ferguson said. The cut into next year's growth, he added, would be comparable to that in 2004. While the Fed, and Greenspan himself, had already forecast that energy prices would cut into growth, the comments from Ferguson were more specific and inspired gains in bond prices. The benchmark 10-year Treasury note was recently up 4/32 while its yield, which moves inversely to price, was down to 4.46%. After inflation fears drove up the 10-year yield from barely above 4% in late August to above 4.50% last week, hawkish Fed comments have helped slow the uptrend. Inflation erodes the value of fixed-income returns and market participants are pleased that the Fed aims to curb inflation. In addition, a diminution of economic growth should hold back inflationary pressures. Ferguson noted that the Fed's policy actions remain governed by the expected performance of the economy and that the central bank continues to closely monitor incoming economic data. The measured pace of rate hikes -- quarter-point increments -- delivered by the Fed since last year, can be accelerated if inflation pressures start increasing, he said. Likewise, if economic weakness were to emerge, the Fed would adjust. In the meantime, "I believe that our policy of removing monetary accommodation at a measured pace is most likely to promote our broader objectives of price stability and maximum sustainable economic growth," Ferguson said. Following the remarks, the dollar shot up to 115.99 yen, a two-year high, while the euro fell to $1.1876, just above its yearly low of $1.1868. The dollar recently fell back 115.44 yen while the euro rose back to $1.199.
The dollar has been on a surprising uptrend this year, supported by the outlook of a tighter monetary policy. According to David Powell, currency analyst with IDEAglobal, the dollar's current uptrend is still being supported by an unwinding of expectations that Hurricane Katrina would force the Fed to pause or shorten its rate hikes. But as mentioned by Ferguson and other Fed speakers, the central bank believes that "the economy remains solid." The dollar, says IDEAglobal's Powell, will continue to move higher as long as there is uncertainty about just how high the Fed plans to lift short-term rates. On Tuesday, San Francisco's Yellen gave an indication. Elaborating on the concept of when the fed funds rate would reach the elusive neutral level, which neither stimulates nor hinders economic growth, Yellen put that level at anywhere between 3.5% and 5.5%. With the fed funds rate currently at 3.75%, "this suggests a presumption that the rate will need to be raised further," Yellen said. That's a wide range, which is likely to keep the markets guessing and dependent, as the Fed, on upcoming economic data.