Wall Street Expecting the Fed to Hold the Line on Interest Rates

Wall Street believes that the Federal Reserve Board will not tighten interest rates when it meets this week, so if it does it could wreak havoc on the market in this abbreviated holiday week.

The Fed’s policy-making Federal Open Market Committee begins a two-day meeting on Tuesday and by Wednesday will announce what action it will or will not take on rates.

“I don’t think the Fed will raise rates this quarter. There are enough signs of weakness indicating there is no uptick in inflation,” said John Chadwick, executive vice president and portfolio manager at Bessamer Trust.

And if the Fed does raise rates? Larry Wachtel, analyst at Prudential Securities, said that it will cut short the holiday plans of many a Wall Street pro.

“There will be the devil to pay if the Fed surprises everyone and tightens by 25 basis points . . . a lot of guys will be coming back from their vacations,” he said.

He said that he is so convinced the Fed will not raise rates that he will take Wednesday off and is not planning to return to work until next Monday. Markets will be closed Thursday for the U.S. Independence Day holiday and will be open only half a day on Friday.

Michael Metz, chief investment strategist at Oppenheimer & Co., said a rate cut would “lead people to believe this was switch in Fed policy and only the first of a series of tightenings.”

“It would signal that the Fed is concerned about inflation, which is a worry that has faded from the minds of most people on Wall Street.”

He said the stock market is already expensive and that a hike in interest rates would make stocks more expensive than bonds and bring into question whether the earnings momentum of the first two quarters of this year could be sustained.