LEH137.50, -0.71, -0.5%) economists Ethan Harris and John Llewellyn described this month's leadership change at the U.S. Federal Reserve, just as it approaches the end of a cycle of interest-rate increases.
The market will get its first sense of how new Fed captain Ben Bernanke will maneuver the jumbo U.S. economy when he makes his first official comments on Wednesday during the semi-annual Humphrey-Hawkins testimony to the House Banking Committee.
Harris and Llewellyn expect him to hint that the Fed isn't quite finished raising interest rates, a message that may not go down well in the stock market.
"We'll start hearing from Bernanke next week," Barry Hyman, equity market strategist at Ehrenkrantz King Nussbaum, said on Friday. "That could be negative for the market because it will get people thinking about more rate increases."
"Next week could be a pretty pivotal week because of the Bernanke testimony," Joe Liro, equity strategist at Stone & McCarthy Research Associates, added. "The market is a little bit concerned about the inversion of the yield curve and just how much more tightening the Fed may have to do over the course of the ensuing couple of quarters."
Private speech
Lehman Brothers may have a better sense of the outlook for rates than other market players right now.
Just days after Alan Greenspan handed the Fed controls to Bernanke, he gave a speech at a Tuesday dinner for bankers and clients of Lehman in which he said the low level of long-term interest rates may have muted the impact of the Fed's rate increases since June 2004, according a report in the Financial Times newspaper.
The remarks were seen as relatively hawkish on the outlook for rates and helped push Treasury bonds slightly lower and sparked a small rally in the U.S. dollar, the newspaper added.
On Thursday, Chicago Federal Reserve President Michael Moskow defended Greenspan's right to speak his mind at private Wall Street events, but added to concerns about further rate increases.
Rates may have to be tweaked higher to keep inflation expectations from rising, Moskow suggested. See full story.
While he thinks the Fed is done raising rates, Oppenheimer & Co. Chief Investment Strategist Michael Metz said any more increases could damage an economy that's already showing signs of slower growth.
"The goal of the Fed was to slow the housing market and I think it's done that," Metz explained. "Any more rate increases and there's a risk the Fed will have overdone it."
Concerns like these helped keep a lid on stock market gains this past week