More likely, many market participants now feel fairly certain that the Fed is close to the end of its tightening cycle. We agree, but there's nothing new in that. Standard & Poor's economists have been forecasting that the tightening will end when the fed funds rate (what member banks charge each other for overnight loans) reaches 4.75% sometime in the first quarter of 2006. So what's different?
The statement by the Fed did not include the familiar wording that "policy accommodation can be removed at a pace that is likely to be measured." In other words, the 25-basis-point increase that has become the hallmark of recent Fed meetings will no longer be automatic. Instead, the Fed will let the economic data determine whether rates should go higher. Some traders assumed that the end of automatic rate increases meant the end of all rate increases.
Two days after the Fed action, stocks weakened. We think this came from the realization on the part of traders that the tightening is not over yet. That day's report of a 0.7% rise in industrial production for November, on top of the 1.3% jump in October, caused some people to worry about rate hikes once again.
In our view, those fears are overblown. The year-over-year change in the consumer price index decelerated to 3.5% in November from 4.3% in October as energy prices retreated. And high fuel costs don't appear to have seeped into other prices. Core CPI, which excludes food and energy, remained stable at 2.1%.
Overall, we see the Fed hiking rates only two more times, and think this augurs well for stocks in the coming year. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook