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Fed Expected to Raise Benchmark Rate Again

January 30, 2006|From Associated Press

One and done. That's been Wall Street's mantra over the last few weeks as it anticipates the Federal Reserve's latest interest rate hike, expected Tuesday. One more hike, and the central bank is done. But the effect on stocks after this decision could be less exciting than many expect.

Although stocks have been volatile this month, much of the last week's gains were fueled not only by strong earnings but also by investors' belief in the one-and-done theory. And there's strong evidence that Wall Street's interest rate prognosticators could be right.

The economy is definitely slowing -- fourth-quarter gross domestic product rose just 1.1% in the fourth quarter, very slow by most standards.

Job growth has likewise been sluggish in recent months, and high energy prices still weigh on consumers.

So if the Fed raises interest rates too much, consumers with variable-rate loans -- credit cards, for example -- will pay more and have less to spend. And businesses, faced with lower consumer revenues, will also pay more to borrow money.

The Fed is still widely expected to raise the nation's benchmark interest rate by a quarter of a percentage point to 4.5%. But it's also expected to signal that its rate hikes are near, or at, an end.

Yet anyone expecting stocks to jump Tuesday when the Fed makes its announcement will probably be disappointed, as Wall Street's reaction probably is already "baked in" to the price of stocks.

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