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Wall St. Week Ahead: Investors will look to Fed to ease volatility

The Wall Street sign is seen outside the New York Stock Exchange, March 26, 2009. REUTERS/Chip East
The Wall Street sign is seen outside the New York Stock Exchange, March 26, 2009. REUTERS/Chip East

By Caroline Valetkevitch

NEW YORK (Reuters) - Stock investors eager to hear from the Federal Reserve about its plans for continuing economic stimulus may get some soothing words from the U.S. central bank next week.

The Fed is unlikely to tip its hand about when it may begin to scale back its bond-buying program, but policymakers still may be inclined to try to tamp down recent volatility in financial markets with some mention of the issue.

The rally in stocks stumbled and Treasury bond yields rose to 14-month highs following Chairman Ben Bernanke's comments that the Fed may decide to begin scaling back its quantitative easing in the next few policy meetings if the economy improves.

As part of its quantitative easing policy, adopted more than four years ago, the Fed has been buying Treasury and other bonds each month to keep interest rates low and promote growth.

Interpreting Bernanke's words and recent signs about the economy have roiled markets since then. The Dow industrials climbed 200 points in eight of the 17 sessions since Bernanke's comments, and its daily average swing has been 191.5 points.

"What (Bernanke) has done is create what I call an early summer market storm, not a huge one but enough to cause people to become a little nervous," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Stocks ended a third negative week in four. The Dow fell 1.2 percent, the S&P 500 slid 1 percent and the Nasdaq lost 1.3 percent

Next week might offer a bit more clarity, he said, but probably not the details many investors are hoping for. Still, analysts said, the Fed may want to say something to remove some of the markets' anxiety.

The markets have priced in a sea change and seem to think that rates are going up soon, said Stephen Massocca, managing director at Wedbush Equity Management LLC in San Francisco. But "I think the Fed is not going to want that to be the market's impression," he said.

The news may be that any change is going to be gradual, he added.

Comments from Fed policymakers in recent weeks have added fuel to the guessing game. Views have ranged from favoring continuing the stimulus policies for some time to starting the process of winding down quantitative easing in the near term.

But Bernanke's views hold the most weight, so investors will likely be on edge awaiting his comments. The Fed chairman is due to give a news conference at 2:30 p.m. on Wednesday shortly after the Fed's policy committee ends a two-day meeting and issues a statement.

RALLY EASES

Although earnings have taken a back seat to Fed talk, forecasts for second-quarter profits have come down in recent weeks. Growth is forecast at 3.2 percent, down from an April 1 forecast of 6.1 percent, and negative preannouncements have outnumbered positive ones by a ratio of 6.9 to 1, according to Thomson Reuters data. That would be the most negative ratio since at least 1996.

Investors worry speculation about the Fed's course alone may have been enough to spark the long-feared pullback in stocks, which have rallied for most of this year. Even with recent losses, the S&P 500 is up 15 percent for the year to date.

The benchmark index is down 2.5 percent since May 21, but there have been short-lived rallies in that period.

Also the gains in bond yields since Bernanke's comments caused investors to rotate out of high-yielding dividend stocks. Dividend stocks had been among the market's leaders as investors favored those shares over fixed-income securities in a low interest-rate environment.

The Dow shot up 200 points and scored its best day since January 2 after the U.S. employment report for May showed 175,000 jobs were created, a positive sign but not strong enough for the Fed to abandon stimulus efforts to aid the economy.

"As we see mixed signals in terms of economic growth from across the globe, a marginal tapering can have significant effects," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

"What would happen if the tapering is too soon, I think, is that it puts risk into financial assets, both equities and bonds."

Among next week's economic reports, the Consumer Price Report for May is due on Tuesday along with data on housing starts.

(Reporting by Caroline Valetkevitch; Editing by Kenneth Barry)

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