Bulls, Bonds, Bernanke.

The week ahead: stock investors look to Fed decision and statement, new chairman, oil and bond markets.

By Alexandra Twin, CNNMoney.com senior writer
March 26, 2006: 9:13 AM EST


NEW YORK (CNNMoney.com) - The waiting is the hardest part.

After all the talk, all the months of speculation, the questions, the curiosity. Next week, it finally happens. Ben Bernanke chairs his first Fed policy meeting.

And while Bernanke! is not as catchy a rallying cry as, say, Jumanji!, it will nonetheless be on the tips of the tongues of most Wall Streeters in the week ahead.

The Federal Reserve holds its two-day monetary policy meeting on Monday and Tuesday and the anticipation of it -- and reaction to it -- are bound to define the tone of trade for at least the next week.

What the central bank will actually do at this meeting is not in question for most traders. In futures contracts on the Chicago Board of trade, investors are pricing in a 100 percent chance of seeing at least a quarter-percentage point rate hike at the meeting. (Full Story).

A 25-basis point hike would push the Fed funds rate, a key overnight bank lending rate, to 4.75 percent from the current 4.50 percent. It would also mark the 15th consecutive rate increase since the Fed began its hiking campaign in June of 2004. (There are 100 basis points in one percentage point.)

What's more up for grabs is what the accompanying statement says about future rate hikes.

"The Fed is going to be the key driver for the stock market next week," said Stephen Leeb, president at Leeb Capital Management. "But additionally, the driver will be the bond market reaction to the Fed and what that implies for interest rates going forward."

He said that a selloff in bonds, that drives up the corresponding rates, would upset the stock market and probably correspond with a stock selloff.

Investors are particularly sensitive to the fluctuations in the bond market of late. Last week, the yield curve again inverted -- a phenomenon in which the yield on short-term rates exceeds that on long-term rates. Often, it has been seen as a harbinger of a recession, although Ben Bernanke has said that he doesn't think it has to be.

Talking the talk
Stock investors are hoping the Fed indicates an end to rate hikes is near, but that may not happen, analysts say.

Bernanke and the other Fed officials have vowed to look to the ongoing data to determine the course of monetary policy, and recent data have been mixed.

Last week's reads on existing home sales and particularly new home sales showed the long-rumored housing market slump may finally be here, which could indicate a slowing economy.

Yet, at the same time, other recent economic reports have been more positive, leaving investors confused.

Investors will also be looking closely to get a better sense of the new Fed chairman. Bernanke took over for Alan Greenspan who chaired the Fed for more than 18 years before stepping down at the end of January.

He's already testified before Congress on monetary policy, and spoken to the Economic Club of New York earlier this week about the yield curve. Yet, market participants are still in the process of familiarizing themselves with the new Fed chief.

"So far, markets are comfortable with him, but it's still early," said Bill Davison, managing director of fixed income at Hartford Investment management. "We'll have to see how passionate he is about fighting inflation."

Investors will also be scouring economic signs next week for hints about inflation, including the personal income and spending reads for February, due near the end of the week. The final read on economic growth in the sluggish fourth quarter is also due next week. (For details, see calendar.)

Resilience still intact
The market has managed to hold up well lately, with the Dow industrials and S&P 500 drifting near almost five-year highs, even amid some discouraging earnings and mixed economic news.

That resilience bodes well for the short term, the analysts say.

The one big negative that continues to lurk is the rise in oil prices, Leeb said. That's something that stocks seem to still be vulnerable to.

But as long as prices don't rise too much, and the Fed continues to move slowly and clearly, stocks should be able to hold steady, said Art Hogan, chief market analyst at Jefferies & Co.

"If the headwinds remain benign, if energy stays in the $55 to $65 a barrel range and if the Fed stops raising rates at 5 or 5.25 percent," Hogan said, "we should be able to continue slowly churning higher.