Sun, Mar 26, 2006 page10

• Wall Street treads water as traders keep eye on Fed

  `Goldilocks' scenario While the US economy has shown just enough growth to allow the Fed to halt its interest rate hikes, traders are anxiously awaiting the next policymakers' meeting

  • AFP
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  Wall Street is looking for a sign from the US Federal Reserve before deciding if its rally has further to run.

  Over the past week, the major indexes did little but tread water in tense anticipation of the first Federal Reserve policymakers' meeting chaired by new Fed Chairman Ben Bernanke.

  The blue-chip Dow Jones Industrial Average was virtually unchanged in the week to Friday, rising a fraction of a point to 11,279.97.

  The broad-market Standard & Poor's 500 index fell 0.33 percent to 1,302.95, while the tech-heavy NASDAQ composite climbed 0.27 percent for the week to 2,312.82.

  After hitting fresh multiyear highs over the prior week, the market is pausing. The recent rally has been attributed to a "Goldilocks" scenario in which the economy moves to a pace of growth that is neither too hot nor too cold, but just enough to allow the Fed to stop its cycle of interest rate hikes.

  "Investors maintain a healthy economic growth outlook, but now with lower inflation and interest rate risks," said Stephen Gallagher, economist at Societe Generale in New York.

  "Investors see the Goldilocks scenario unfolding, and risks, like rising interest rates, receding," he said.

  The only problem with this outlook is that Wall Street is not sure if the Fed and its new chief are buying the argument.

  The Federal Open Market Committee meets tomorrow and Tuesday, and is widely expected to implement its 15th consecutive quarter-point increase in the federal funds rate, currently at 4.5 percent.

  More important for investors, however, is the Fed statement that will provide clues for its outlook and future policy actions. Most investors see the Fed stopping at 5 percent, but this view is not unanimous.

  The optimistic view has been roiled by contradictory data: A tame consumer inflation report was offset by another showing a high rate of increase in core prices at the wholesale level.

  A strong report on existing home sales was muddled by another showing a steep decline in new home sales.

  Dick Green at Briefing.com said that with the economic news mixed, it may be premature to predict the course of action of the Fed, especially with a new chairman.

  "There is a risk that the market will be disappointed by the March 28 Fed policy statement ... Bernanke hasn't even chaired his first policy meeting, and yet the market is optimistic that he has both proven himself a worthy inflation fighter and that the end of the rate hikes is now in sight. The market may have gotten ahead of itself on this issue," Green said.

  Stephen Auth, an analyst at Federated Investments, said that the near-term action on Wall Street was highly dependent on a signal from the Fed.

  "The timing is important, because stocks are unlikely to move up decisively until the Fed signals that it is done" with hiking rates, Auth said.

  A recent speech by Bernanke suggests "the likelihood of another rate hike or two after next week's meeting," Auth said.

  But he added that if the Fed raises rates too high, it could trigger a sharp slowdown in the economy.

  "It's hard to know how much to worry," Auth said. "Mr Bernanke still is a relatively unknown quantity. Until he establishes more of a track record, interpretations of his views probably will change frequently."

  The bond market was also in limbo ahead of the Fed meeting.

  The yield on the 10-year US Treasury edged up slightly to 4.675 percent from 4.674 percent a week earlier and that on the 30-year bond fell to 4.695 percent from 4.717 percent.

  Bond yields and prices move in opposite directions.
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