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Once again, Wall Street is all about the Fed

Investors can expect the Federal Reserve’s latest decision on short-term interest rates when policymakers meet Wednesday.
/ Source: The Associated Press

This week Wall Street gets exactly what it has been waiting for: the Federal Reserve’s latest decision on short-term interest rates.

Investors are more than certain the central bank will lift the nation’s key interest rate another quarter percentage point to 5 percent when policymakers meet Wednesday. That would mark the 16th consecutive increase in 2 years.

The critical aspect of the Fed’s announcement will be its assessment of the economy’s health and how it views current inflationary pressures, which is why the central bank has been boosting rates in the first place.

What’s holding the stock market back is uncertainty about the pace of economic growth, analysts say. While recent data has shown a booming economy in the face of higher lending rates and soaring energy prices, with that comes the prospect of rising prices as companies spend more to hire workers and expand their operations. Meanwhile, a jittery oil market has catapulted prices at gas pumps to sit near $3 a gallon, up 32 percent from a year ago.

Fed Chairman Ben Bernanke has said the Fed could pause — but not necessarily stop — its rate tightening as it strives to find a healthy balance for the economy. But if the Fed gives any indication that more increases are in store, Wall Street will be right back where it started.

“My sense is that the Fed is as confused as the rest of us,” said Jack Ablin, chief investment officer for Harris Private Bank. “That said, if they do come up with more dovish language, I think the market will take that as a cue to continue buying.”

Despite the uncertainty, the market rallied last week although two Labor Department reports showed jumps in labor costs and average wages. Coupled with a historic low unemployment rate, the economy could in the beginning stages of an inflation cycle, Ablin said.

With virtually no data addressing inflation this week, investors will be focused primarily on the Fed’s policy statement. The government’s weekly update on unemployment claims and data on prices for imported goods may give clues about how the economy is faring, Ablin added.

Strong April retail sales, moderating job growth and cooling oil prices helped stocks rally last week, putting the Dow Jones industrial average at a new six-year high and just 145.54 points from its all-time record close of 11,722.98. For the week, the Dow surged 1.85 percent, the Standard & Poor’s 500 index gained 1.16 percent and the Nasdaq composite index climbed 0.86 percent.

Economic data
Traders will be awaiting the government’s Wednesday update on domestic oil and gasoline reserves as worries over possible supply shortages overseas lift crude futures to record levels.

Besides its weekly tally of jobless claims to be released Thursday, the Labor Department issues April data on prices for imported and exported goods, often a helpful measure of inflationary pressures caused by foreign exchange rates. In March, import prices excluding oil dropped 0.3 percent, while export prices excluding agriculture gained 0.2 percent.

And Friday, Wall Street will get the latest read on consumer confidence from the University of Michigan’s preliminary consumer sentiment index for May, forecast to fall 0.9 points to 86.5. The index has slipped in recent months as rising mortgage rates and gasoline prices threaten consumer spending.

Earnings data
Cisco Systems Inc. reports its results after the closing bell Tuesday. The networking equipment maker is expected to post a profit of 26 cents per share for its fiscal third quarter, a modest rise from 23 cents the year before. Cisco’s stock has rallied this year to finish Friday at $21.75, up 27 percent from its 2005 close of $17.12.

Also Tuesday afternoon, media and entertainment company Walt Disney Co. releases its second-quarter profit, forecast to fall a penny to 31 cents per share. Disney shares have also seen a sharp pickup in 2006, climbing 27 percent from a November 52-week low of $22.89 to finish Friday at $29.09.

J.C. Penney Co. Inc. will give a glimpse of consumer spending in the face of high energy costs. When the department store chain reports Thursday morning, analysts predict quarterly earnings will jump to 83 cents per share from 63 cents last year. The 2006 rally has carried Penney shares to a recent eight-year high of $67.45 a week ago. The stock closed Friday at $66.58.

The Fed’s Federal Open Market Committee meets Wednesday to decide its latest move on interest rates. Stocks typically move sharply as investors digest the 2:15 p.m. policy announcement.