ANALYSIS: Market might prefer taking interest medicine now
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By EILEEN GLANTON, Associated Press
NEW YORK (May 13, 2000 6:55 p.m. EDT nandotimes.com) - The Federal Reserve's slow and steady
approach to cooling the economy hasn't worked, leaving many analysts to predict that the central bank's Open
Market Committee will raise interest rates a half-percentage point - the steepest increase since February 1995
- when it meets Tuesday.
Higher interest rates are generally bad for stocks. Yet most market watchers believe that a bigger-than-usual
increase could be a tonic for a weak and woozy Wall Street.
"The best thing for the market would be to get it over with," said Bob Dickey, managing director of technical
analysis at Dain Rauscher Wessels in Minneapolis. Dickey believes that the Fed will opt for a half-point
increase. Anything less would leave investors in the same jittery funk that has characterized the market for
several weeks.
If the Fed does raise rates by a half-point, "investors can probably breathe a sigh of relief and get back into the
market," Dickey said.
An interest-rate increase Tuesday would be the sixth since June 1999. Through its policy of gradual hikes, the
Fed has tried to engineer a "soft landing" for the high-flying economy, hoping to keep inflation under control.
So far, no one is claiming the Fed's policy has been a success, although this past week, economic data
released by the government revealed a flickering sign of a slowdown. Retail sales ebbed a bit, but most
analysts blamed poor weather instead of a shift in consumer sentiment.
Slightly better news came on Friday, when the Labor Department reported that the Producer Price Index, a
measure of inflation pressures before they reach the consumer, fell 0.3 percent. That was on a par with analysts'
estimates, and pleased investors enough to send stocks higher for a second straight session.
But the rally came on light volume, indicating that many investors were staying out of the market or making only
modest bets. In truth, many analysts said, investors were already looking well into the future - past next
Tuesday's meeting and straight on to the next, scheduled for June 27-28.
By then, said Greg A. Smith, chief investment strategist at Prudential Securities, investors will need to see
concrete evidence that the economy has slowed.
"Investors will be on the lookout now for any statistic that hints of moderating economic growth, so that they can
gain a sense of security that the Fed is finished - or nearly finished - raising interest rates," he said. "This would
provide the opportunity, or at least an excuse, for a substantial rally."
Mindful that higher interest rates can cut into corporate profits, making it difficult for stocks to advance, some
analysts are tempering their expectations.
"There's been a Goldilocks effect in recent months, where the market has been running either too hot or too
cold," said Richard L. Babson, chairman and president of Babson-United Investment Advisors. "The meeting
should provide a short-term impetus to move forward, but I think there will still be a wall of worry for investors to
climb."
Many analysts believe that interest rate worries will be on the back burner by the middle of the year. Whether the
economy is still booming or not, few economists expect the Fed to touch rates in the months surrounding the the
presidential elections in the fall.
But if the economy keeps growing, the interest-rate debate could keep the market locked in a trading range for
the rest of the year, Dickey believes. That's what happened between February 1994 and February 1995, when
the Fed raised interest rates seven times.
"That year, the market was very neutral," he said. "I think that will be the net result of this year's action as well."
During the week ended Friday, the Dow Jones industrial average rose 31.51 points to close the week at
10,609.37. On Friday, the Dow rose 63.40.
The Nasdaq composite index had the worst weekly performance of all major indexes, shedding 287.76 points.
A gain of 29.48 on Friday left the blue-chip index at 3,529.06.
The Standard & Poor's 500 slipped 11.67 during the week. On Friday, the index rose 13.15 to close at
1,420.96.
The Russell 2000 index of smaller companies fell 21.90 during the week. The index edged up 1.55 on Friday to
close at 490.94.
The Wilshire Associates Equity Index, which represents the combined market value of all NYSE, American and
Nasdaq issues, ended the week at $13.15 trillion, off $234.71 billion from last week. A year ago, the index was
at $12.30 trillion.
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