Meaningful Meetings

A gathering that will occur next month and one that took place on Nov. 10 could have implications for investors

By Joseph Lisanti

The next meeting of the Federal Open Market Committee (FOMC), the part of the Federal Reserve that sets targets for the fed funds rate, is set for Dec. 13. We expect another increase.

Each of the last 12 FOMC meetings ended with a quarter-point boost. But Alan Greenspan's term as Fed chairman expires after the Jan. 31 meeting. David Wyss, Standard & Poor's chief economist, suggests that the Fed might raise short-term rates by 50 basis points on Dec. 13 to signal the end of the current round of tightening.

He contends that such a move would allow Ben Bernanke, the likely new chairman, more freedom in setting policy. "If the Fed raises rates a quarter point in both December and January, it will be hard for Chairman Bernanke not to raise again in March, and we will probably end at 5% instead of 4.5%," says Wyss.

There is not much difference for the economy between fed funds at 4.5% and 5%. Even so, we think stretching out the process could pressure stocks.

On Nov. 10, the Financial Accounting Standards Board (FASB) met to discuss whether to put the weighty subject of pension accounting on its agenda. It decided to tackle pension reform, in two phases. In the first phase, FASB plans to require companies to put pension assets and liabilities on their balance sheets by the end of next year.

In the second phase, the FASB plans to tackle the various assumptions companies can make when calculating net pension expenses or income. At the start of each year, companies are now permitted to assume high returns on their pension assets. Even if they are not achieved, these "returns" can be used to boost earnings.

The FASB will begin to address how to remedy this problem. We think the discussion, though necessary, is likely to cause investors to reconsider some companies' earnings reports.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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