Stocks Wary of the Fed

A tighter central bank keeps Wall Street glum.


The single biggest head wind to stocks this week continues to be the Federal Reserve, whose committee that sets short-term interest rates is meeting today and tomorrow.

As the central bankers get set to start unwinding all the support offered up to head off the credit crisis, stocks will lose another buffer of easier money they enjoyed when interest rates were falling fast. The Fed has lowered the federal funds target rate from 5.25 percent last September to 2 percent.

Now, with rates expected to stay on hold (and eventually start rising again), markets are left to deal with high energy costs (see UPS and FedEx), another bad housing number, and an uncertain economy.

The upshot is that the Fed has shifted course because America's growth prospects look better than they did just a few months back.

Action Economics estimates the Fed will raise its economic growth forecasts for the fourth quarter about "halfway back" to the 1.3-to-2 percent level it expected back in January from the worryingly slow 0.3-to-1.2 percent growth rate the Fed hinted at in April following the worst of the credit crisis.

The central bankers probably won't commit to raising rates by August as markets expect they will. But the language of the statement to be issued tomorrow at the end of their two-day meeting is likely to include new hints that keep the Fed's focus moving away from worries over growth and toward a return to restraining inflation pressures.

The Fed's change of heart is welcome, as it shows Ben Bernanke and company are moving out of crisis mode and back to a more normal operating scenario. But with stocks already retesting March lows, investors evidently aren't taking too much comfort.