FEDERAL RESERVE
Rate hike `99%’ certain
Economists and market observers say the Federal Reserve is all but certain to take steps to raise interest rates when it meets Tuesday and Wednesday.
“It’s a 99 percent probability they will raise rates,” said Al Kugel, chief investment strategist with Stein Roe Investment Counsel. He, like most other Fed observers, is expecting an increase to 1.25 percent from 1 percent, a 46-year low.
The bigger question, Kugel said, is how much higher rates will go through the rest of the year.
“Greenspan talks about a measured increase, and it will probably run for the next 12 months or longer,” Kugel said.
Last weekend, Alan Greenspan was sworn in for his fifth term as Fed chairman. In the past, Greenspan has implemented repeated but small changes in interest rates, rather than opting for one or two big moves.
Kugel expects that to continue, with the Fed perhaps raising rates by 0.50 percent once or twice.
The Fed moves interest rates down to stimulate the economy, as was the case during the recession at the beginning of this decade, or up to curtail spending and fend off inflation, as was the case in the mid-1990s.
“Inflation is perking up gradually,” Kugel said, and wages appear to be rising as well after years of stagnation.
More Top Picks Reef Octopus Vs Nyos Protein Skimmers
That is a recipe for the Fed to start cooking.
EQUITIES
Fed action factored in
Rising interest rates typically are no friend of stocks, and can be toxic for bond prices.
Businesses find it more expensive to borrow for expansion. When rates get high enough, consumers cut back on borrowing, and that crimps the demand for goods and services, further hurting companies.
But some say higher interest rates already are factored into stock prices, meaning no turmoil is likely in the exchanges this week.
“This has been priced into the market for more than a month,” said William Hummer, chief economist with Wayne Hummer Investments. “I think the market has discounted” a rate increase.
In the studiously dry idiom of government economists, the Fed issues a brief statement after every meeting. The statement is closely parsed by analysts to see how the Fed views the future.
Hummer said he expects a bit of reassurance from the Fed.
The statement “will play down any imminent inflation threat,” he said.
Bond prices move inversely to interest rates, meaning their current value tends to go down when rates go up. In other words, bond investors get beat up when interest rates increase.
But Hummer says bond prices already reflect higher interest rates, and much of the damage already has been done.
“I think the bond market will retain its equilibrium,” Hummer said.
He said bond prices might even rise a bit in a relief rally, if the Fed raises interest rates just 0.25 percent.
EMPLOYMENT
More gains forecast
Economic reports due out this week include Chicago-area and national manufacturing on Wednesday and Thursday, respectively, but the one likely to draw the most interest is the jobs report for June, scheduled to be released Friday.
Economists don’t expect much change. A Bloomberg survey of 20 economists produced an average forecast for the unemployment rate of 5.6 percent. Economists also are predicting that 240,000 jobs were added, following a gain of 248,000 in May.
If the comments last week of other Fed officials are any indication, the economy is doing pretty well.
“Output growth is robust and we are embarked on a new period of sustained expansion,” said Anthony Santomero, president of the Federal Reserve Bank of Philadelphia.
And Fed Governor Ben Bernanke said in a speech that he isn’t anticipating higher prices.
“The most likely case for the rest of the year is that core inflation will stabilize in the region, with which I’m comfortable,” he said.