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David Callaway
April 29, 2010, 12:01 a.m. EDT · Recommend (4) · Post:
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By David Callaway, MarketWatch
SAN FRANCISCO (MarketWatch) -- It was always probably too much to expect the Federal Reserve would raise interest rates or signal its plans to boost them on a day that Europe almost cracked on debt concerns.
Any change to the historic low-rate environment in the U.S. -- while widely expected later this year -- would have shocked the markets this week, and likely drawn more investors to the dollar from the badly weakened euro.
So if Ben Bernanke & Co. cared at all about Europe -- and they do -- then they weren't going to risk adding any volatility to securities markets on edge about how contagious the Greek debt crisis will be on the continent.
Germany's Chancellor Angela Merkel says Greek aid talks need to be accelerated and calls for Greece to do its homework if Germany is to step in on behalf of the euro.
The Fed can't postpone the inevitable, though, and after a 10-week run in stocks the market is primed for a turn, likely with the help of more debt chaos in Greece, Portugal, Spain and Italy -- as well as financial reform uncertainty in Washington. Wednesday's marginal recovery in the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (INDU 11,045, +53.28, +0.48%) from its 213-point plunge on Tuesday was largely tied to investors waiting for the Fed decision in the midafternoon. It won't be the end of the latest bout of volatility.
That's why taking a step this week toward prepping investors for higher rates might have not been such a disastrous decision. Just as politicians and corporations try to use bad news days to sneak out their own negative announcements, the concern in the markets about Europe might have helped mask the shock of a statement that the Fed was moving toward a rate rise later this year.
The downside of delaying the inevitable another month, as articulated by Kansas City Fed President Thomas Hoenig in a dissenting statement that was part of the rates announcement, is that the Fed puts itself behind the farther eight ball when economic growth really starts to pick up. The risk is that when it does need to start raising rates, it will have to do so faster than most investors expect.
Also, what if Europe is even worse eight weeks from now when the Fed meets again? Anyone want to bet the bankers and politicians in charge of saving the euro get this sorted out before they run for Cote d'Azur in August?
The mini-run on the euro and the corresponding rise in the dollar has all sorts of implications for the dollar-priced commodities markets and the ripple effect from rising gold and oil. Bernanke is taking a big risk by waiting for more good domestic economic news, as the markets have shown they're tightly tuned to the Europe debt story and the financial reform battle.
Certainly the betting is that the U.S. economy will continue to improve, however slowly. And deals like Hewlett-Packard Inc.'s /quotes/comstock/13*!hpq/quotes/nls/hpq (HPQ 53.28, +0.03, +0.06%) $1.2 billion takeover of Palm Inc. /quotes/comstock/15*!palm/quotes/nls/palm (PALM 4.63, -0.02, -0.43%) late Wednesday are encouraging for merger and acquisition enthusiasts hoping to see deal stocks climb, and tech investors looking for big firms to spend their cash hoards buying smaller companies.
Indeed, without Europe and financial reform hanging over them, the markets would be hard pressed to find much to worry about this summer. Like it or not, though, we're about to hit a rough patch. It may be short or it might last all summer, but it is coming.
As I've said before, it's not rising interest rates that scare the markets. They are so low right now that they would have to rise for months if not a few years before they start to have an economic impact. It's the threat of when they will start rising that's the problem. That first signal by the Fed will kick off a series of volatile trading sessions as investors adjust their portfolios to the new reality.
Too bad Bernanke didn't get it out of the way when he could have.
David Callaway is editor-in-chief of MarketWatch.
David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator.
As the Coast Guard prepares to torch a slick oozing from Gulf of Mexico oil fields, the good folks of Nantucket, Mass., vow to continue their decade-long struggle to halt the nation's first offshore-wind farm.
5:16 p.m. April 28, 2010 | Comments: 7
- GoWithTheFlow | 11:09 p.m. April 28, 2010
"Fed can't delay market storm: It was always probably too much to expect the Federal Reserve would raise inter... http://on.mktw.net/9R8juN" 11:41 p.m. EDT, April 28, 2010 from dcallaway
"Each time the Fed delays on signaling a turn in the rate cycle, it risks a bigger reaction in stocks when it finally has to act." 4:46 p.m. EDT, April 28, 2010 from dcallaway
"God's bankers on trial, but market has already moved on to the next crisis.....Greece/euro is looking ugly" 10:57 a.m. EDT, April 27, 2010 from dcallaway
"Market ends HIGHER on Obama Wall Street threat...seems some folks see a weak bill going through..." 3:22 p.m. EDT, April 22, 2010 from dcallaway
"Meet the new Goldman derivatives business: Meet Goldman Sachs, international airline. No baggage fees; volcan... http://on.mktw.net/bpAoWX" 11:17 p.m. EDT, April 21, 2010 from dcallaway
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