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Inflation fears may spark Fed interest-rate hike

The Federal Reserve, meeting this week to discuss the economy, may raise its benchmark interest rate by a quarter point to 2 percent in the wake of an end to summer’s “soft patch” of  slow job growth, high energy prices and lackluster consumer spending .
/ Source: The Associated Press

Stocks are surging, businesses appear to be hiring again, and a pro-business administration is about to start a second term in the White House. What could Wall Street possibly be worried about?


The Federal Reserve meets this week to discuss the economy and likely raise its benchmark interest rate by a quarter percentage point to 2 percent. The move is designed to make capital harder to come by, thus reducing prices and keeping inflation in check. Analysts added that even with the key interest rate rising, rates remain historically low and should not present too much difficulty for growing businesses.

But inflation itself is another matter. This summer’s economic “soft patch” — slow job growth, high energy prices and lackluster consumer spending — may be over, and some analysts believe the economy is ripe for inflation to take hold.

As businesses hire new workers, productivity decreases and corporations must spend more to train new employees. That means their profit margins contract — unless those costs are passed along to consumers.

Add to that an increased demand for goods due to fresh wages from those new jobs, and inflation is a real possibility. Either that, or fourth quarter profits could come under pressure.

Reassuring the Street
While this unease is in its early stages, and the markets will likely continue to enjoy a postelection rally through the end of the year, the Fed’s statement after its Wednesday meeting will need to reassure Wall Street that monetary policy makers have the situation in hand.

Last week, the major indexes rose every day as President Bush won a second term, oil prices fell below $50 per barrel and the Labor Department announced the creation of 337,000 jobs in October. The Dow Jones industrials have been up eight of the last nine sessions, while the Standard & Poor’s 500 and Nasdaq Composite Index have climbed for nine straight sessions.

For the week, the Dow gained 3.59 percent, the S&P rose 3.18 percent and the Nasdaq climbed 3.24 percent. It was the Dow’s best weekly showing since March 25, 2003.

One to watch: Labor report on Tuesday
With inflation foremost in mind, Wall Street will look closely at the Labor Department’s report on October import and export prices, due out Tuesday before the session along with a report on the nation’s trade balance. Export prices rose 0.2 percent in September, while import prices rose 0.1 percent. A sharp rise in import prices, in particular, could be troublesome.

Friday’s retail sales report will also be a strong indicator of pricing power, and could be problematic no matter which way the figures go. If October retail sales rose beyond the 0.1 percent increase expected, then inflation worries may increase.

If the number comes in below that, then retailers’ earnings could be harmed if sales don’t improve for the holiday season. Sales rose 1.5 percent in September.

Tech bellwethers
A pair of technology bellwethers could set the tone for the market once the Fed’s decision has been digested. Networking giant Cisco Systems Inc. reports on Tuesday after the session, and is expected to bring in 56 cents per share for the quarter, up from 51 cents a year ago. The stock has fallen 31.5 percent from its Jan. 16 high of $29.13, closing Friday at $19.97.

Dell Inc. has managed to avoid a similar fate, and is up 10.3 percent year-to-date. The stock fell to a low of $31.20 on March 8, but has gained steadily to close at $37.49 on Friday. Dell, which reports after Thursday’s session, is expected to earn 33 cents per share, up from 26 cents per share in the year-ago period.

Retail stocks will be closely watched as Target Corp. reports its earnings on Thursday before the session. The discount retailer is expected to earn 37 cents per share for the quarter, up from 33 cents per share a year ago. Target has risen 38.6 percent from its 2004 low of $37.40 on Jan. 5, closing Friday at $51.83.

Other notable companies reporting earnings in the week ahead include:

  • Embattled insurance company Marsh & McLennan Cos., reeling from investigations into its business practices. It is expected to earn 68 cents per share for the quarter, up from 65 cents per share from a year ago.
  • Coffee retailer Starbucks Corp., expected to earn 25 cents per share when it reports on Wednesday after the session, up from 17 cents a year ago.
  • Luxury retailer Tiffany & Co., reporting before Thursday’s session, forecast to earn 19 cents per share, on par with last year.
  • Pixar Animation Inc., which could have another blockbuster on its hands with “The Incredibles,” expected to earn 24 cents per share, up from 23 cents per share a year ago, when it reports after Thursday’s session.

FOMC meets Wednesday
The Fed will hold a one-day meeting of its Open Market Committee on Wednesday, where it is all but certain to raise interest rates from 1.75 percent to 2 percent. The Fed’s decision and its accompanying statement usually come in after 2 p.m.

Bond markets will be closed on Thursday, Veteran’s Day, though the stock markets will remain open.