Fortune Investor Data
Take a deep breath, everybody -– the stock market may be about to blow its own bubble. Everybody knows that Fed chairman Allan Greenspan is going to raise interest rates by one quarter point, most likely on Wednesday. And everyone’s reasonably sure that the markets, which have been stewing about this for weeks, will take off on the news like a bull outta hell, especially when they read the Fed’s post-meeting comments Wednesday and find no hint of further action. But do they know this rally could be its own worst enemy? "My guess is that the Fed won’t do much thinking about what they’ll do down the road in terms of hikes -– they’ll wait until August, when they have two more months of data," says TIME senior economics reporter Bernard Baumohl. "And that data will depend a lot on what the markets do between Wednesday and then."
Here’s the daisy chain: Fed hikes rates. Markets, relieved, take off. Consumers, watching their portfolios swell, continue to spend like drunken sailors. Fed gets nervous, and Greenspan -– if he deems that an economic overheat is imminent -– goes into rate-hike mode all over again, confronting the markets with their worst fear and sending Street walkers back to cowering under their desks. Bye-bye rally. Of course, if investors and traders see all this coming and sell on the news, they may have to make room under that desk for Uncle Alan -– a harmless rate hike will have begotten a serious monetary neurosis. "The Fed won’t announce a bias like last time, because this is the hike it was warning us about," says Baumohl. "It’s shifting back into neutral." Of course, to a market that’s just aching to be unleashed, "neutral" is like raw meat to a roomful of Dobermans. Let’s just hope they don’t choke on it.