Newspaper article THE JOURNAL RECORD

Market Response to Further Fed Actions Could Be Severe / Dow Puts Together Net Advance for Week

Newspaper article THE JOURNAL RECORD

Market Response to Further Fed Actions Could Be Severe / Dow Puts Together Net Advance for Week

Article excerpt

In the two weeks since the Federal Reserve raised its discount rate, the stock market has apparently absorbed the jolt of the news without much lasting damage.

But if the Fed under its new chairman, Alan Greenspan, takes further steps to raise the key rate in the months ahead, the market's response could be more severe, some analysts say.

Under the ``three steps and a stumble'' principle formulated years ago by the prominent technical analyst Edson Gould, a series of three overt credit-tightening steps by the Fed is a likely harbinger of a bear market for stocks.

When the central bank raised the rate it charges on short-term loans to private financial institutions from 5.5 percent to 6 percent on Sept. 4, its stated intent was to ``deal effectively and in a timely way with potential inflationary pressures.''

Many Fed-watchers translated that to mean the Fed wanted to keep the dollar from falling much further in foreign exchange.

In the view of some observers, a half-point increase wasn't enough to accomplish that mission, and they predicted at least one more increase would follow before too long.

Greenspan seemed to counter that speculation in the past week, when he declared he saw scant evidence that inflation was accelerating.

But a day after he spoke, the government reported that the Consumer Price Index increased 0.5 percent in August, for its sharpest rise since January.

Unfortunately for those who would plan their financial strategies based on what the Fed does or doesn't do from here on out, market analysts have some trouble agreeing on how to read the historical relationship between the discount rate and stock prices.

``Discount rate increases are not necessarily bearish,'' argues Norman Fosback, editor of the advisory letter Market Logic. ``That is particularly true when the increase, as now, is but the first after a string of decreases.

``Even the second discount rate increase in a row is not necessarily a harbinger of doom for a bull market. …

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