TRADERS LISTEN TO FED; ANNOUNCEMENTS SIGNAL TIGHTENING; SILENCE MAY ALSO.

Byline: Deborah Lagomarsino Bridge News

Federal Reserve Board Chairman Alan Greenspan has left little doubt in traders' minds that the Fed will raise interest rates this week for the first time since March 1997, but the key question is whether more will follow.

Economists expect the Fed to signal Wednesday that it is keeping the door open to future rate hikes if consumer demand continues to outpace productivity gains at a time when labor markets are already tight. The Fed is seen as retaining its tightening bias, but few expect the Fed to again announce its policy directive unless it is looking to send a stronger statement to the markets.

The issue of the bias ``has become the point of suspense. The market hopes the Fed will go back to neutral after they've tightened. If they signal the tightening bias is still there,'' it's likely to weigh heavily on stocks and bonds, said Carl Tannenbaum, chief economist, LaSalle Banks/ABN Amro.

While the Fed has tended to shift back to a neutral bias, or symmetric directive, at meetings in which it changes the federal funds rate, analysts doubt that will be the case this time because of the Fed's new practice of sometimes announcing shifts in directive. If the Fed shifts from a tightening bias to neutral and announces it, the risk is that the markets interpret it to mean further hikes are not likely, which may be misleading.

``If there is a statement saying they are going to a symmetric directive, the reaction may be similar to the one after Greenspan spoke, where people jumped to the conclusion that this means they're either going to move just once or a limited number of times,'' said Henry Willmore, senior economist at Barclays Capital.

Willmore acknowledged that the Fed's traditional practice has been to switch to a neutral bias after a move in the fed funds rate, but this time he thinks it's likely they'll stick with the tightening bias but not announce it.

``If they want the market to clearly anticipate at least one more rate hike, the way to do that is to retain the tightening bias,'' said Tim O'Neill, chief economist at Harris Bank/Bank of Montreal.

``I would interpret silence on the bias to mean they are maintaining it. If there is silence, that's the sentence they are stating. If they announce it, there is an exclamation point at the end of it,'' he said.

David Jones, chief economist with Aubrey G. Lanston, characterized the Fed's statement accompanying the rate action as ``very significant.'' He expects the Fed will largely reiterate its May 18 statement in which it first announced a shift to a tightening bias.

In that statement, the Fed said it was concerned about the potential for a buildup of inflationary imbalances ``against the background of already tight domestic labor markets and ongoing strength in demand in excess of productivity gains.''

``The one reason the Fed will tilt the wording in the direction of being concerned about imbalances that may produce inflation is, I think, Greenspan was very unhappy with the markets' response to his June 17 testimony - the quick assumption that there would be only one quarter-point change,'' Jones said.

``If the markets assume that this is the only one, stocks and bonds will rally and that will push demand growth up even faster,'' he said.

The markets initially viewed Greenspan's phrase that ``modest pre-emptive actions can obviate the need of more drastic actions at a later date'' as signaling only one rate hike may be needed. Others viewed his remarks about the recovery of financial markets and the world economy since the Fed's three rate cuts last fall as an indication he may be considering reversing those cuts.

In recent days the markets have become increasingly nervous that the Fed may raise rates more than once as traders began to view Greenspan's testimony in a more hawkish light. Those fears drove the 30-year bond yield to a 19-month high last Thursday.

While some economists expect this week's rate hike may be the only one that's needed if the roaring U.S. economy starts slowing in the second half of the year to a near-3 percent pace, others are less sure the long-awaited slowdown will materialize.

``I just don't know how people can figure out if the economy is going to slow,'' said Aubrey Lanston's Jones.

``If the Fed didn't tighten at this June meeting, it would lose control of the stock market and the economy, demand would continue to soar further based on higher stock prices and threaten potentially greater inflationary imbalances,'' Jones said.