Wall Street's hopes that the Federal Reserve will soon end its 21-month-long campaign to raise interest rates might get either vindicated or shot down Monday night. Chances are it will be the latter.

Freshly appointed Fed Chairman Ben Bernanke will speak at 7 p.m. EST to the Economic Club of New York, a forum regularly used by former Chairman Alan Greenspan to send messages. In May 2005, for instance, it was there that Greenspan said there was some "froth" in the real estate market.

Ten months and six rate hikes later, Bernanke faces a different environment. The housing market has been cooling since last summer but the underlying economy has remained strong -- strong enough that the market was -- until recently -- expecting the Fed to lift the fed funds rate at least three more times to 5.25%.

Those expectations, together with indications of global monetary tightening, had pushed up bond yields and pressured stocks in recent weeks.

But recent indications in February data -- especially weak retail sales, a tame consumer price index and rising jobless claims -- have now convinced many that the Fed will stop at 5.0% -- if not at 4.75%, the very optimistic "one-and-done" scenario.

News on Monday that the Conference Board's index of leading economic indicators had fallen in February did little to change this view. Bond prices continued last week's uptrend, and their yields, which move inversely, fell back.

The benchmark 10-year Treasury bond rose 4/32 while its yield fell to 4.66%. The 10-year yield had risen to a high of 4.8% a week ago from 4.3% in January.

Stocks, which had been feeling the bite of rising bond yields since mid-March, also rallied last week, with the Dow Jones Industrial Average adding 200 points.

On Monday, however, stocks barely moved amid caution ahead of Bernanke's speech.

The Dow dropped 5 points, or 0.05%, to 11274.53. Pfizer ( PFE) rose 0.4% after a report it may have found a buyer for its consumer-products unit. Merck ( MRK) advanced 0.03% after announcing it will buy the rights to painkilling drugs from Neuromed Pharmaceuticals.

The Nasdaq Composite rose 0.3% to 2314 on positive expectations ahead of Oracle's ( ORCL) earnings. (After the close, Oracle posted EPS of 19 cents, a penny ahead of expectations. But sales of new database licenses were soft , and Oracle shares were recently down 2.1% to $13.43 in after-hours trading after having risen 0.9% to $13.72 in the regular session.)

The S&P 500 dropped 0.2% to 1305, weighed down by energy stocks and rate-sensitive issues. The Amex Oil Index dropped 2.0%, led by big drops in Kerr-McGee ( KMG) and Occidental Petroleum ( OXY) as crude oil plunged 3.7% to close at $60.42 per barrel amid expectations of rising inventories.

Such a plunge in energy, being good for growth and inflation, would normally have boosted stocks. But it did little ahead of Bernanke's speech, with rate-sensitive stocks such as homebuilders on the downside.

The Philadelphia Stock Exchange Housing Sector index dropped 1.5%, led by big declines in Toll Brothers ( TOL), Hovnanian ( HOV)and KB Home ( KBH).

Indeed, chances that Bernanke will validate the market's end-of-rate-hikes hopes are remote.

First, he still needs to signal another rate hike at the Fed's March 28-29 meeting next week, as the market already fully expects. He probably won't want to signal much more than that, which would take away some of the thunder of the meeting, the first he'll preside over as chairman.

Second, many economists expect that the weakness seen in February was only due payback for a very strong January, which had been affected by unusually warm temperatures. It's unlikely that the Fed would jump to conclusions about an already weakening economic trend just based on the latest batch of data.

According to Lehman Brothers economist Drew Matus, Bernanke likely will repeat the Fed's recent emphasis on a tightening labor market, high energy prices and rising capacity utilization.

At best, Matus sees more chances of an insight into Bernanke's thinking if he speaks on the lag of monetary policy. If the chairman sees the Fed's 14 rate hikes so far as having some impact growth -- i.e., the slowing housing market -- that would be fairly close to a green signal to the one-and-done crowd.

But for Lehman economists, who still expect the Fed to deliver another four rate hikes, it will simply mean that further hikes will become even more data-dependent after next week's move.

The third and biggest risk to the market's hope for the end of rate hikes, regardless of whether they are valid or not, is the hope itself. The fact that's it's already been priced into bond and stock prices mostly set the stage for disappointment.

"The risk, anyway, is that the market has gone a bit too far on the tame inflation story," says Michael Gregory, interest rate strategist at BMO Nesbitt Burns. "Bernanke just being balanced in his assessment of the economy and inflation probably won't be enough to fuel the market much further."

Unless Bernanke goes out of his way to send the all-clear on rates, some dreams might be shattered.
In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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