Submitted by admin on Sat, 2005-10-08 01:00. ::
In a weeklong blitz of speeches about inflation and interest rates, regional Federal Reserve bank presidents spooked the Dow Jones industrial average into its biggest weekly loss in four months — six weeks for the Standard & Poor's 500.
It would have been worse except for a slight uptick in buying after the government's report Friday that the economy lost only 35,000 jobs in September. But the market lost its early momentum and was falling at the close. Weekly losses were close to 3 percent for the major indexes.
For the most part, strategists blamed a busy schedule of speeches and comments by regional Fed presidents who indicated they saw inflation as a bigger problem than the prospect of slower economic growth from hurricane damage — even damage to Gulf Coast oil supplies.
The message is that investors can expect the Fed to go on raising interest rates as part of its effort to restrain inflationary economic growth. The Fed has raised its short-term federal funds rate 11 times since June 2004, to 3.75 percent.
"Inflation, while still tame, is creeping up ever so slightly, and the Fed is not sure that corporations will continue to absorb cost increases that normally would be passed on to consumers," Phil Larkins, senior portfolio manager in Atlanta for Northern Trust Co., said Friday.
Some strategists had hoped the Fed would pause in its rate increases after Hurricane Katrina. But the Fed made another quarter-point rate increase at its Sept. 20 policy meeting, which the markets interpreted as a clear signal that inflation is still the principal concern.
President Richard Fisher of the Federal Reserve Bank of Dallas said Fed policy-makers must not "let the inflation virus infect" the U.S. economy "and poison the system."
Philadelphia Fed President Anthony Santomero — another member of the FOMC — and Kansas City Fed President Thomas Hoenig also indicated inflation was the "main concern," although Hoenig added that a "massive breakout" in prices was unlikely.
William Poole, president of the St. Louis Federal Reserve Bank, said speculation that the Fed might raise rates as many as two more times this year would be "reasonable."
In an interview with Reuters news agency, Atlanta Fed President Jack Guynn this week said the Fed's series of rate boosts still had "a way to go." But he also said "we're well along" on this path.
In addition to the speech-making, September reports by the Institute of Supply Management — an organization of purchasing managers — also hurt the markets this week by revealing significant commodity price increases in both the manufacturing and service sectors of the economy, compared with August.
In an analysis of the Fed's rate policy, University of Maryland professor Peter Morici said Friday that the central bankers may be "unnecessarily scaring stock markets" since inflation fears "are grossly exaggerated, and higher interest rates may cripple the economy."
"The Fed is behaving as if we were in the 1970s, when union contracts would ignite wage-price spirals — not so with an 8 percent private sector unionization rate," he said.
"With Katrina and Rita already sapping consumer confidence and consumers' having little additional money to accommodate higher gas prices, the economy is going to slow significantly with or without Fed action," Morici said. "All the Fed is accomplishing with its rhetoric is to panic the stock market."
The market finally got a break on Friday with gains from heavy hitters such as Caterpillar, ExxonMobil, General Electric and International Business Machines. But 15 of the 30 stocks in the Dow Jones industrial average were losers.
The Dow closed on Friday at 10,292.31 with a gain of 5.21 points, or 0.1 percent. For the week it fell 2.6 percent, its biggest weekly percentage decline since June 24.
The Standard & Poor's 500 gained 4.41 points, or 0.4 percent, to 1,195.90 on Friday, but fell 2.7 percent for the week — its biggest weekly percentage decline since April 15.
The technology-weighted Nasdaq composite index also suffered its biggest weekly percentage loss since April 15, dropping 2.9 percent. On Friday, however, the Nasdaq gained 6.27 points, or 0.3 percent, to 2,090.35.
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