Sun, Sep 16, 2007 - Page 10 News List

Wall Street keeping eye on Fed moves amid renewed vigor


Wall Street's renewed vigor over the past week has come from optimism about a US Federal Reserve cut in interest rates, yet it remains unclear what happens if and when the Fed delivers.

Analysts say markets have priced in a reduction in borrowing costs and will look for hints from the US central bank about further moves to keep the rally on track.

And some see turmoil in the market if the Fed does the unexpected or offers a message out of synch with sentiment on Wall Street.

In the week to Friday, the Dow Jones Industrial Average lifted 2.51 percent to 13,442,52.

The broad market Standard & Poor's 500 index added 2.11 percent to 1,484.25 and the tech-heavy NASDAQ climbed 1.42 percent on the week to 2,602.18.

The key focus for the market will be Tuesday's Federal Open Market Committee (FOMC) meeting, expected to cut its base rate, which has been at 5.25 percent since June last year.

Most analysts expect a reduction of 25 basis points, but some are betting on a more aggressive 50-point cut as a pre-emptive strike against recession. Still, some warn about taking the move for granted.

"Investors continue to look ahead to Tuesday's FOMC meeting acting as if a Fed decision to lower interest rates is a sure thing," said Fred Dickson, chief market strategist at DA Davidson.

"While we place the odds of the Fed cutting interest rates as being very high, there is a real possibility that, given recent rising inflation pressures, they might choose to pass, waiting to see more data regarding the inflation situation," he said.

Other analysts say it may be too simplistic to believe that a Fed rate cut can cure all the economic ills, with the US housing market in a painful recession and lenders hurting as well as consumers.

"Central banks are now more fearful that flagrant easing could inflate asset price bubbles -- global lessons learned from the US stock market froth that followed the 1998 Fed rate cuts and the US housing market froth that followed the 2001-2003 cuts," said Michael Gregory, an economist at BMO Nesbitt Burns.

Some worry that the market may be disappointed with a quarter-point rate cut.

"A 25 basis-point move could be viewed as a Fed that is calm and in command, or complacent," said economist Ethan Harris at Lehman Brothers.

"A 50-point move could be viewed as either `getting ahead of the curve' or `a sign of panic.'"

Still, Harris said the Fed had little choice except to cut rates, and that the move will eventually soothe the market and help unblock credit.

The yield on the 10-year Treasury bond rose to 4.462 percent from 4.368 percent a week earlier, and that on the 30-year Treasury increased to 4.724 percent from 4.693 percent. Bond prices and yields move in opposite directions.

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