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NYSE: Wall Street braces for new Fed message

Whipsawed by fresh worries on the financial sector, Wall Street enters the summer season with investors in a sour mood ahead of a meeting of increasingly hawkish US Federal Reserve policymakers.

Market jitters have risen amid high oil prices, troubles in the banking sector and the prospect of higher interest rates despite soft economic conditions. Auto sector troubles also have intensified.

In the week to Friday, the blue-chip Dow Jones Industrial Average skidded 3.77 percent to end at 11,842.69, closing below 12,000 for the first time since March.

The Standard & Poor’s 500 broad-market slumped 3.10 percent to 1,317.93 and the tech-heavy NASDAQ composite fell 1.97 percent on the week to 2,406.09.

Sentiment faces yet another test in the coming week, when the US Federal Open Market Committee (FOMC) headed by Federal Reserve Chairman Ben Bernanke is expected to signal a tougher position on inflation that could eventually mean higher interest rates.

“All eyes will be on the FOMC which is slated to announce its latest policy decision on Wednesday,” said Meny Grauman, economist at CIBC World Markets. “The markets seem convinced that the Fed will hold rates at 2 percent, but there is considerably more uncertainty about whether the Fed will signal a tightening bias.”

The Fed’s shift in tone has been closely watched by analysts. After slashing rates by 3.25 points over the past few months in an effort reignite growth, the Fed has signaled that it is unlikely to cut rates further and may boost rates if inflation gets out of hand.

“The Fed is approaching a danger point, in our opinion,” said Ethan Harris, senior economist at Lehman Brothers. “It is very unusual for it to contemplate hiking rates when the unemployment rate is steadily moving above its inflation-neutral level.”

Market troubles over the past week were fueled by growing worries about the banking sector. Citigroup’s warning of more writedowns from real-estate losses and a need for fresh capital from regional bank Fifth Third fueled fears about the sector.

“Each day the Street is seeing similar news — such as higher energy costs, financial losses, worries of inflation, and continuing housing slumps. The bleak news is keeping investors from stepping into the market,” said Colleen King at Schaeffer’s Investment Research.

Gerard Cassidy at RBC Capital Markets said bank stocks are headed for a brief rebound from their troubles as they recognize losses from real-estate investments.

“Though we expect the bank stocks to rally as much as 20 percent into second-quarter earnings announcements, we believe the fundamental trend is still bearish for banks stocks,” he said. “Credit problems are expected to deteriorate over the next 12 months, which should drive stock prices lower in the second half of this year, in our opinion.”
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