As Fed Holds Rates Down, Investors Face Tough Choice
Markets are likely to react badly when credit tightens, but bulls say that's not today's worry.
Tom Petruno

January 25, 2004

Imagine you're on a train that's taking you toward somewhere you really want to be. Imagine also that you're clairvoyant, and you know the train will wreck at some point — you just don't know exactly when.

Do you stay on the train for as long as you can, hoping to jump off just before the wreck?

That, in essence, is the question that faces big and small investors alike this year as they debate what the Federal Reserve may do with interest rate policy, when it will do it and how a Fed shift could affect financial markets.

Central bank policymakers will meet Tuesday and Wednesday, their first gathering in the new year. It's virtually certain they will hold the target level for their key short-term interest rate at a generational low of 1%, which is where it has been since June.

But everyone knows that, barring unforeseen calamity, the Fed can't keep rates at this level forever. If the economy continues to improve, Chairman Alan Greenspan and his cohorts eventually will have to tighten credit.

And when they do, that's when the train wreck occurs, many investors fear. Though it's true that the Fed has tweaked interest rates countless times over the last century without causing catastrophe, the concern this time is that the economy, and financial markets, may be so addicted to rock-bottom rates that any upturn would trigger panic selling on Wall Street, slam the housing market and cause many other unpleasant side effects.