With both short- and long-term interest rates inching closer to 5 percent—a level they haven't hit in about four years—investors are getting antsy. They want to know how many more times will the Federal Reserve Board hike rates.
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Conventional wisdom has been all over the map on this question.
At the start of the year, when Alan Greenspan was still chairman of the Fed, many were betting that the central bank's Federal Open Market Committee was done raising rates. This sentiment sent stocks soaring in January, led by the most speculative types of equities, including small-company stocks and emerging markets shares.
But soon after Greenspan retired and Ben Bernanke took his place, there was a feeling that the Fed would raise rates one or two more times, based on rising inflation fears. That moderated the euphoria on Wall Street.
Then, when the Bernanke-led Fed raised rates in March, the markets began to think that the Fed might continue to raise rates through the summer because of increasing worries about an overheating economy.
This morning, conventional wisdom began to change once again, thanks to a speech last night by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City.
In an address in Kansas City, Hoenig reportedly told local business leaders that the Fed is "very close to where we need to be" in terms of setting the nation's interest rate policy.
Economists were up all night trying to parse Hoenig's statement. In a commentary published this morning, Merrill Lynch economist David Rosenberg pointed out a minor word choice. "Note that he said the funds rate is at a level 'to what we think is neutral.' He didn't say 'I' – he said 'we.' "
Is this a major point? Who knows?
For the remainder of the year, "the market is going to play FOMC member," said Ernest Ankrim, chief investment strategist at the Russell Investment Group. That means investors are likely to overreact to anything that might drive the Fed's decision to either raise rates more or to leave them alone.
If this is true, then investors might prepare for a bumpy ride in the stock market for the next several months.
