Sun, Jul 02, 2006 - Page 10 News List

Wall Street given a boost by Fed hints

CAUTIOUS OPTIMISM The US Federal Reserve's moves on Thursday sent markets higher, but analysts say that it's too soon to say there won't be more rate hikes ahead

AFP , NEW YORK

A few hints from the Federal Reserve helped Wall Street break out of the doldrums and charge higher over the past week, but some analysts say it may be premature to get too excited about the market.

The Dow Jones Industrial Average jumped 1.47 percent for the week to 11,150.22 and the tech-heavy NASDAQ composite rallied 2.39 percent to 2,172.09.

The broad-market Standard and Poor's 500 advanced 2.06 percent on the week to 1,270.20.

The market, reassured by the Federal Reserve's apparent indication that it may be near the end of its rate-boosting cycle, heads into a holiday-shortened week with trading expected to be light tomorrow and exchanges closed for Independence Day on Tuesday.

The main indexes go into the second half of the year mixed, and market watchers say the key to a good year may be how corporate earnings hold in the the face of an expected economic slowdown.

The Dow is up 4.04 percent for this year and the S and P 500 up 1.76 percent, but the NASDAQ is off 1.51 percent.

In the key event for markets, the Fed and its rookie chairman Ben Bernanke, which concluded a two-day policymaking meeting on Thursday, raised rates for the 17th time to bring the federal funds rate to 5.25 percent.

But some modest changes in the Fed statement gave markets enough of an indication that the Fed may be ready to pause, and stock and bond prices surged.

Patrick Fearon, a senior economist at AG Edwards, said the statement contained "small clues, but I think it's unmistakable that they are getting ever closer to pausing in their cycle of interest-rate hikes."

Fearon added, "We see some light at the end of the tunnel. It's not guaranteed there won't be another rate hike, but I think most people looking at this action would see the odds of another rate hike are lower."

Other analysts said the markets may have celebrated a bit too soon, noting that inflation remains an issue even as the economy is slowing.

"The post-Fed-hike cheer was mostly about a market that had braced itself for the worst of all messages and didn't get it," said Avery Shenfeld at CIBC World Markets.

"The bullish reaction in all markets might be a case of breaking out the champagne a bit too early ... As for the language on the future direction of policy, it was no different than at the prior FOMC, and we now know that that language didn't stand in the way of a further hike," Shenfeld said.

Ethan Harris, chief US economist at Lehman Brothers, agreed that the market faces more challenges.

"We think the markets seriously overreacted to the directive and we have not changed our Fed call" for rates to go to 5.75 percent.

"It is much too early to declare victory over inflation. If the recent 0.3 percent core inflation readings are part of a new trend, it will take a lot more work to reverse the acceleration of inflation," Harris said.

Fred Dickson, chief market strategist at DA Davidson, said the market will turn its focus to corporate earnings season now that the latest Fed action is over.

"With the Fed meeting out of the way, investors should begin to concentrate on upcoming earnings reports," he said.

"We believe most of July's earnings news will be positive, but we suspect the accompanying guidance for the third and fourth quarters will be very cautious as companies echo the Fed's comments about `moderating economic growth,'" Dickson said.

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