The Fed's expected end to its 18-month campaign to hike interest rates means good news for stocks, but a more volatile bond market and a resumed slide in the U.S. dollar.
The release last week of the Federal Reserve's minutes from its Dec. 13 meeting set off a stock market rally that experts believe will continue throughout the year, although many expect the economy to slow downin the second half of 2006.
The flip side is that lack of a clear direction for interest rates introduces lots of uncertainty into the bond market. "This will probably be the trickiest year for bond investing this decade," said Jeffrey Gundlach, chief investment officer of TCW Group Inc., Los Angeles.
The anticipated halt in the federal funds rate increases — expected to plateau at either 4.5% or 4.75% — also means the Feb. 1 transition of the Fed's chairmanship to Bernard Bernanke from the 18-year tenure of Alan Greenspan is expected to proceed seamlessly. "Greenspan has orchestrated a nice handoff to Bernanke," said Bruce Harley, head of U.S. government derivatives for INVESCO Inc., Louisville, Ky.
The Fed had already signaled its intent to bring its seemingly relentless increases in the federal funds rate to a close following the Dec. 13 Federal Open Market Committee meeting. Since June 2003, the rate had steadily moved up to 4.25% from a 46-year low of 1%. In a December release, the Fed said interest rate policy was no longer "accommodative" — that is, interest rates were no longer bolstering the economy and instead had reached a neutral level.
But the stock market needed further clarification that the rate hikes were over. That confirmation came Jan. 3 when the minutes were released, resulting in a 2% two-day gain in the Standard & Poor's 500 index.