New York Market: Fed expected to act on rising jobs' pressure

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The Independent Online
US STOCKS are likely to fall further this week on expectations that the Federal Reserve will raise interest rates on 24 August. Investors "are worried that the Fed is probably going to tighten", said Thomas McManus, an equity portfolio strategist at Bank of America Securities. "The correction is in full bloom."

The spectre of rising rates sent two main indexes lower for a third week, a concern given more credence when the July employment report showed that the economy added 50 per cent more jobs than expected last month - proof to many that the economy is growing fast enough to spark inflation. Henry Cavanna, at JP Morgan, said the Fed needed ammunition and "being practically at full employment" suggested the Fed would act.

The Dow Jones Industrial Average was little changed on the week at 10,660.84; the S&P 500 Index fell 2.6 per cent to 1,294.20; and the Nasdaq slid 3.8 per cent to 2,536.35. September futures on the Federal funds rate show that investors are building in an 80 per cent probability of a rate increase on 24 August.

The Fed last raised rates on 30 June, by a quarter point to 5 per cent. It also shifted to a neutral stance, implying it would not raise rates again unless there were signs of inflation.

Chairman Alan Greenspan told Congress last month that one indicator that might force the Fed to act would be a shrinking pool of available workers - which would put pressure on wage levels and filter through to higher prices for goods and services. "This further reinforces the view that we may be seeing signs of pressure in the labour market, and the odds are better for further rate increases," said John Bartlett, at Commerce Bancshares.

Average hourly wages rose by 0.5 per cent in July, higher than the 0.3 per cent expected by analysts.

Robert Bacarella, president at Monetta Financial, anticipates the main indexes will fall another 3 to 5 per cent from current levels before a rate increase will be fully discounted.

Investors will see several economic reports before the policy-making Federal Open Market Committee meets. The government releases figures on retail sales on Thursday, and on prices paid to farmers and other producers on Friday. July's consumer price report comes on 17 August.

However, few expect a repeat of last year, when the Dow average fell 19.2 per cent between its 1998 high on 17 July and 31 August in the wake of the Russian financial crisis.