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Investors hoping that early 2007 brings both a so-called “soft landing” for the economy and lower interest rates could be disappointed after Tuesday’s (Dec. 12) Fed policy meeting.
According to a report on CNNMoney.com, that doesn’t mean these things won’t happen next year. It’s just that most analysts expect the Federal Reserve to hold interest rates steady for the fourth time in a row and to continue to trumpet the threat of inflation over the threat of recession.
In other words, if the Fed is thinking it might cut rates early next year, it isn’t likely to tell the market Tuesday.
“The financial markets have recognized that the Fed’s inflation concerns haven’t panned out,” said Michael Strauss, chief economist at Commonfund. He said that this has been suggested in recent reads on core inflation, labor costs and the inflation component of the recent November jobs report.
In addition, other reports – such as Friday’s employment report – have suggested that maybe the economy is not slowing as rapidly as had been feared.
All of which raises the question of whether “we get a glimmer of a hint that the Fed recognizes this,” Strauss said.
He said he doesn’t think the Fed will be as forthcoming as the recent data have been.
“I would be extremely surprised to see any change in the language,” said Michael Swanson, senior economist at Wells Fargo.
How stock investors will react is a matter of some debate.
Stocks have been more or less on the rise since late July, with no big hiccup until the end of November, when a barrage of discouraging readings on housing and the manufacturing sector sent stocks lower.
Yet the recent economic news has been more good than bad, allowing stocks to resume their upward move.
“Until a few weeks ago, stock investors were looking for a drop in interest rates sometime in the first quarter of 2007,” said Chris Johnson, chief investment officer at Johnson Research Group.
Johnson said that recent stronger readings on the economy have lowered expectations of an interest rate cut as soon as the first quarter. In addition, Fed chair Ben Bernanke said as recently as last week that he was worried about inflationary pressures.