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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: Murrey Walker who wrote (49156)	3/29/2002 1:40:24 PM
From: Jim Willie CB	Respond to of 65232

A 'Neutral' Fed Scares Wall Street Mar 29 12:19pm ET siliconinvestor.com By Pierre Belec NEW YORK (Reuters) - Just when Wall Street thinks it has figured it out, something comes out of the blue to change the rules. Two months ago, investors thought if Federal Reserve Chairman Alan Greenspan cut interest rates enough, it would end the recession. Since then, the tide has turned to how soon will the Fed start raising interest rates to smack down inflation amid signs the economy is sprinting back. The jury is still out on whether the recovery in the first quarter can be sustained. The reason? The recession was led by Corporate America, while consumers kept the economy's ship afloat with strong spending. But don't get fooled. In five out of the last six recessions, the economy slipped back into recession after showing signs of recovering. So a head-fake cannot be ruled out. While the central bank chief has not tipped his hand on raising interest rates, Wall Street is reassessing the odds of tighter money, after Greenspan said the risks to the economy now are evenly balanced between a slowdown and inflation. That would be bad news for the stock market. Penny Russell, economist for H.C. Wainwright & Co. Inc., believes the best Fed is an inactive Fed. "No one at the Fed -- not even its illustrious chairman -- is capable of managing a large and complex economy like the U.S., or of knowing just when to raise and when to lower interest rates to keep growth within a predesignated range," she says. The first rate rise could come as early as May, some economists say. If they're right, that will mark a shift in policy after the Fed's string of 11 interest-rate cuts in 2001. If the Fed raises interest rates by late spring, it would be a departure from the norm. Historically, there's a nine- to 13-month gap between the time the slow-moving Fed stops lowering rates and begins to bump up the cost of borrowing money. The big fear, though, is the central bank may tinker too soon, and perhaps even too much, with short-term interest rates after pushing rates to a 40-year low last year. Stocks have been rattled by the prospects of higher interest rates. Right now, financial markets are pricing in a 50-50 chance the key federal funds rate, the rate banks charge each other for overnight loans, could climb to 5 percent by mid-2003 from the current 1.75 percent. FED'S VISION FAULTED What investors find troubling is the Fed's incredibly bad record in spotting changes in the economy. Not convinced? You be the judge. The central bank raised interest rates to a 10-year high between 1999 and 2000 to snuff out what turned out to be phantom inflation. But the increases totaling 175 basis points from June 1999 to May 2000 shocked the economy and caused the nation's growth to stall, sending the fast growing New Economy -- technology and telecommunications -- into a free fall. Then came the rapid-fire rate cuts in 2001, including two reductions each of 50 basis points in January, to re-energize the economy as the Fed faced a recession that was not reacting -- so it seemed -- to one of the most massive monetary policy easing campaigns in its history. The Fed was so worried that interest rates were becoming ineffective economic tools that it weighed the use of "unconventional" measures at its policy-making meeting in January. The unspecified measures were to be brought into play if the rate slashing did not spark a rebound soon. "Unconventional policy measures night be available," if "the economy were to deteriorate substantially in a period when nominal short-term interest rates were already at very low levels," according to the minutes of the rate-setting Federal Open Market Committee meeting on Jan. 25-26. Some people speculate the unorthodox measures would have included dropping rates to zero. But the recession that supposedly would never end turned out to be one of the shallowest since World War II. Fast forward to March this year and the master mechanics of the world's biggest economy are talking about the risk of inflation. FED GUIDED BY FEAR OF FEAR ITSELF it continues on... Allen Sinai, chief global economist at Decisions Economics, says the Fed will need to avoid panicking financial markets by using the right tone to communicate to the stock market. "The likely tone of the central bank going forward will be to couch monetary policy in terms of 'accommodative' or 'neutral' rather than in terms of 'taking back' any extra insurance pumped last year," he says. PEERING UP GREENSPAN'S SLEEVES Sinai sees the following scenario: Higher interest rates around mid-year, with an increase of 75 to 100 basis points, perhaps by the second half, with the tightening coming in baby steps of 25 basis points each. "But between the March 19 and May 7 Federal Open Market Committee meetings, a lot of information suggesting a very vigorous exit from recession would have to be forthcoming to push the Fed to an actual tightening," he says. and on more... me: at risk the most are high PE stocks / Jim