US Federal Reserve set to raise rates again

 

The US Federal Reserve is set to raise interest rates again tomorrow. The rate increase is widely expected but observers feel that the Fed may be coming to the end of its rate-raising cycle. The Fed has been raising rates partly in response to an increasing inflationary threat. However, the latest inflation figures, like the euro zone figures, looked a lot less threatening when oil prices were stripped out.

Most analysts expect oil prices to continue falling as increased production comes on line following the next OPEC meeting later this month. However, for several years now the chairman of the Federal Reserve, Mr Alan Greenspan, has also warned about "irrational exuberance" in the stock markets, leading to excessive consumer spending.

Many in the markets are hoping that faced with continuing good news on the inflation front the Fed will stop raising rates.

But in the New York Times yesterday Mr Robert Barbera, the chief economist of Hoenig & Company, warned that in reality Mr Greenspan is concerned about how the stock market has changed over the last year. If this is the case, it is likely that the Fed will keep on raising rates until the tech stocks cool down.

Over the past year the prospect of higher rates has held back the so-called old economy stocks. But technology stocks have continued to roar ahead. Even last week when the Dow made record gains the Nasdaq fell more than 11 per cent in the first 3 1/2 days of trading, then made up most of the losses in the final 1 1/2 days.

At the same time, the so-called old economy stocks took off. The Dow Jones industrial average was up 666 points, or 6.7 per cent, for the week. That's the largest weekly percentage gain for the Dow since the summer of 1984. In points, it is by far the largest weekly leap to date.

If the Fed does continue raising rates there is a question according to Mr Barbera if the old economy stocks - not to mention the old economy itself - can withstand the onslaught.