Wall Street Expects Interest Rate Jump

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AP / CBS
After nearly two decades of decoding Alan Greenspan's famously opaque speaking style, financial markets are having to learn to interpret his successor — Ben Bernanke. So far, the results have been a little rocky.

Wall Street widely expects Fed policy-makers will boost a key interest rate to the highest level in five years when they meet on Wednesday.

Lackluster forecasts from Cisco Systems Inc. and Federated Department Stores Inc. left stocks slightly lower Wednesday. Trading was likely to be volatile as Wall Street looked ahead to the Fed's policy statement Wednesday afternoon. While the central bank was expected to boost short-term lending rates to 5 percent, investors were fixated on whether the Fed would indicate that a pause — or more increases — could be in store.

In midday trading, the Dow lost 3.44, or 0.03 percent, to 11,636.33, a fresh six-year high. The Dow was about 85 points from its best-ever close of 11,722.98, reached Jan. 14, 2000.

Broader stock indicators declined. The Standard & Poor's 500 index was down 2.02, or 0.15 percent, at 1,323.12, and the Nasdaq composite index sank 9.75, or 0.42 percent, to 2,328.50.

Bonds inched upward as traders awaited the Fed's statement. The yield on the 10-year Treasury note slid to 5.1 percent from 5.13 percent late Tuesday.

The prospect of higher interest rates weighed on the dollar, which fell against the Japanese yen and was flat versus European currencies. Meanwhile, gold prices climbed past a 25-year high of $700 an ounce.

It would be the 16th quarter-point increase in a credit tightening cycle that began nearly two years ago and would leave the federal funds rate, the interest that banks charge each other, at 5 percent.

A Fed rate increase would raise borrowing rates for millions of consumers and businesses as commercial banks match the move with a quarter-point jump in the prime lending rate, pushing it to 8 percent.

There is a wide split over what happens next. Some economists believe the Fed will stop with the funds rate at 5 percent, up significantly from the 46-year low of 1 percent in effect before the rate increases began.

Others think the Fed will only pause for a meeting or two and then raise rates one or two more times. And still a third group thinks there won't be any pause as the Fed continues a steady march toward higher rates.

Part of the blame for the confusion is being assigned to Bernanke, who took over as Fed chairman on Feb. 1.

He roiled markets over the past two weeks, first with testimony before the Joint Economic Committee on April 27 that the markets read as a strong signal that the Fed was going to pause in its string of rate increases, and then the next week when he told a reporter that the markets had misinterpreted his comments.