Tags: Markets | Await | Fed | Decision

Markets Await Fed Decision

Monday, 12 December 2005 12:00 AM

1. Consumer Debt Down, Manufacturers Respond

The Federal Reserve Board has announced that Americans are borrowing less money – and that's bad news for banks, mortgage lenders and other institutions.

A new Fed report shows consumer debt declined by 4% in October (a record for that month), with borrowing levels off by an annualized $7.2 billion. Car loans absorbed the biggest hit, falling $5.6 billion at an annual rate.

There are still major questions about whether or not that's good news for the American economy.

While car makers, banks, holiday retailers and other industries that benefit from higher spending may not welcome a decrease in borrowing, the fact that Americans are signaling an attempt to get out of debt is good news for the economy in the long-term.

No doubt the auto industry saw this "bad news" coming.

Both GM and Ford announced layoffs over the last few weeks, after new-car sales dropped off sharply in October – the same month borrowing declined.

Now car manufacturers are trying to get back into the game with heavy price rollbacks and rebates. Ford even ran a television ad during Sunday's football games offering $5,000 off its specialty Eddie Bauer-outfitted SUV.

Now manufacturers must wait to see if Americans – who appear increasingly skittish about taking on more debt – will bite.

2. Markets Await Fed Rate Decision

What exactly will the Federal Reserve do with interest rates at tomorrow's Fed meeting?

Stock market traders would love to know.

Reuters is reporting that the Fed will lift interest rates by a quarter-point tomorrow but that it may be the last time the agency raises rates for a while.

"Everybody's kind of set on the fact that we're going to see an increase. It's kind of baked into the cake. The language is going to be key, and investors are expecting we're near the end of this cycle," Christopher D. Johnson, director of quantitative analysis at Schaeffer's Investment Research, tells Reuters.

The stakes are high – any sign of increased inflation may force the Fed's hand in ways that could hurt the market.

Says Anthony Chan, managing director and senior economist at J.P. Morgan Asset Management: "If the Fed says it sees more upside inflation risk, that would be devastating to the market."

Further muddying the market waters is the price of crude oil, which crept up to over $60 a barrel on Monday amidst reports that the highly populated U.S. Northeast would be in a deep freeze for the next two weeks.

"That reignited fears about the impact of higher energy costs on consumers and corporations," says Reuters.

But regardless of the Fed's decision on interest rates or the price of oil, the stock market is expected to finish flat for the year, pretty much in line with analyst expectations.

3. Holiday Danger: Online Credit Theft

Large numbers of American consumers indicate they will shop online this holiday season.

But shoppers also say that they fear credit card identity theft and will pull the plug if online retailers don't protect their credit card information.

Consequently, the quality of online retailers' card protection will go a long way toward how much business they do this holiday season.

According to a December 2005 IDG Research survey sponsored by Sun Microsystems, consumers are well aware of identity theft and companies are likely to lose business if they fail to securely handle customer information.

"Two-thirds of adults with Internet connectivity who participated in the survey expect to shop online this holiday season, with 14% of them planning to do half or more of their holiday shopping online," says IDG.

"But 67% of Internet users who were part of the study said they were likely to stop shopping at an online store if they found out that their personal information was compromised."

Some 34% of survey participants reported they had either been a victim of identity theft or knew somebody who had. Another 83% said that people are more likely to become victims of identity fraud around the holidays.

"Contact the credit card company immediately and report unauthorized charges to its fraudulent claims department," says University of Alabama-Birmingham finance professor Lance Nail, Ph.D.

"They will investigate the claim, cancel the credit card and send you a new card with a new number. If they don't offer a new card and number, ask for it."

Nail adds that a handful of credit card companies have zero-liability policies to protect cardholders from being held responsible for fraudulent charges.

4. Weed Out Fund Losers

It's no secret that mutual fund profits are passed through to investors as taxable income – even when the earnings are reinvested and never leave the fund.

That's critical to remember in 2005, which has been a major year for "pass-throughs." It also means your tax hit may be higher than usual, says certified financial planner Geordie Crossan, president of NBS Financial Services.  

Crossan says that in order to offset the hit, now is the time to weed out money-losing investments so you can trigger offsetting losses. Also, reconsider the types of investments you are currently holding in taxable portfolios. Keep in mind that while dividends and capital gains are taxed at a maximum rate of 15%, interest income is taxed at ordinary income tax rates as high as 35%.

"Moving money from CDs, savings accounts and bonds into dividend-paying stocks might be something to think about going into 2006, so you're not hit as hard next year," says Crossan. 


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1. Consumer Debt Down, Manufacturers RespondThe Federal Reserve Board has announced that Americans are borrowing less money - and that's bad news for banks, mortgage lenders and other institutions. A new Fed report shows consumer debt declined by 4% in October (a record...
Monday, 12 December 2005 12:00 AM
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