More decline of dollar ''almost inevitable,'' BIS says


Investors Hope the Fed
Will Come to the Rescue

By E.S. Browning
The Wall Street Journal
Monday, June27,2005

As this week moves ahead, Wall Street could begin to resemble one of
those old E.F. Hutton brokerage-firm commercials: when the Fed
talks, people will listen.

By Thursday, when the Federal Reserve finishes its two-day meeting
on interest rates, traders and money managers could pause in their
debate about oil prices and profit forecasts, and crane their necks
to hear what Alan Greenspan and his Fed colleagues have to say.

Right now, all anyone can think about is oil, China, and China's
demand for oil. But beneath the surface, a significant source of
hope among investors is the expectation that the Fed will ride to
the rescue. Before the year is out, many money managers believe, the
Fed will send a signal that it is ending its rate-increase program
and maybe even preparing to cut rates. When that happens, they
expect, stocks finally will break out of the doldrums they have
endured for most of this year.

The current thinking: It probably won't happen on Thursday. The
widespread expectation is that Mr. Greenspan & Co. will bump their
target rate for overnight bank lending up to 3.25%, the ninth
consecutive quarter-point increase since they started raising rates
one year ago. But as long as their postmeeting statement doesn't
contain any surprises, hopes will spread for an end to the Fed rate
increases by August, or September at the latest (the Fed doesn't
meet on monetary policy in July).

"The signal will come at the August meeting," as the Fed concludes
that wage inflation isn't a problem, says John Lynch, chief market
analyst at Evergreen Investments, Wachovia's money-management unit.
Mr. Lynch says he expects second-quarter corporate profits, due in
mid-July, will be stronger than expected, but "I don't think the
market is going to move on that until investors are confident that
the Fed is done."

Those hopes were too distant to help stocks last week. After hitting
a three-month high a week earlier, the Dow Jones Industrial Average
succumbed to anxiety over crude oil's push toward $60 a barrel. The
Dow fell 325.23 points, or 3.1%, to 10297.84 last week, including a
drop of 123.60 points, or 1.2%, on Friday. It was the year's second-
heaviest weekly decline, leaving the blue-chip stocks down 4.5% for

Why the sudden sag? Part of it is normal market churning as
investors wait for the Fed. But part of it is a fear that high oil
prices, together with the Fed's rate increases themselves, could
slow economic growth, hurting corporate profits.

If oil stays at or above the $60 level (it finished the week at a 22-
year high of $59.84), the stock market is going to face "more of a
struggle than I would have guessed earlier," says Henry Herrmann,
chief investment officer at mutual-fund group Waddell & Reed in
Overland Park, Kan. Instead of the 7% to 8% return for 2005 that he
has been forecasting, including dividends, he would expect something
closer to a flat year, he says.

Aside from oil, another worry in the market is the Fed itself.

"We are cautiously optimistic on the stock market, particularly for
the second half of the year," says John Kattar, chief investment
officer at Eastern Investment Advisors in Boston. But that optimism
is based partly on his expectation that the Fed will stop raising
rates after two more increases.

In the past, Mr. Kattar says, the Fed has tended to raise rates too
much, causing market troubles or even a recession. "We think they
are sensitive to the risk of overshooting this time," he says. But
if they were to continue raising rates, "at the margin we would
become less positive on stocks," he says.

Anxiety over how the economy will hold up could be seen not only in
the stock market's swoon but also in the sharp decline in the yield
of the 10-year Treasury note. Ordinarily, bond yields rise when the
Fed increases short-term rates, but this time, they have stayed
persistently low. The 10-year yield was just above 3.9% on Friday,
compared with 4.6% a year ago, when the Fed increases began.

Part of the reason is artificial. Interest rates in many European
countries and Japan are even lower, which draws money to the U.S. So
does investment in U.S. bonds by Asian trading partners that are
running a surplus with the U.S. But another reason for low yields is
a persistent fear that oil, the Fed and a hangover from excess
investment in the late 1990s will hurt the economy. A report Friday
on May durable-goods orders indicated that, aside from airplane
orders, corporate spending on new equipment remained soft.

Many money managers, however, dismiss these worries as alarmist.
Gordon Fowler, chief investment officer at Philadelphia money-
management firm Glenmede Trust, sees signs that the economy is in
the midst of a longer-term growth cycle. The service economy is less
volatile than the manufacturing economy, he says, and is less
susceptible to high oil prices and even to Fed rate increases. He
believes the stock market could prove more resilient to outside
pressures than many expect. But because stock prices are high
compared to corporate profits, he adds, the gains over the next few
years could be modest, averaging 5% to 6% a year, including


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