If the Federal Reserve raises short-term interest rates again Tuesday, it would probably be the last time for a long time. But if it does not, a November rate hike should not be ruled out, according to several economists.
Neither route would be good news for bank stocks, whose valuations have suffered disproportionately as concerns about higher rates have loomed over the financial markets.
Observers of the central bank are sharply divided about what may happen Tuesday, but they increasingly feel the Fed will not let year-2000 computer-related concerns cancel a move later.
"My guess is that they will adopt a tightening bias" in monetary policy, said Ian Shepherdson of High Frequency Economics in Valhalla, N.Y. "That will go down badly in the markets but not half as badly as a rate hike itself would." A tightening bias would mean the Fed is leaning toward action soon.
Fed officials typically send discreet signals of an impending rate change. They have not done so recently, in contrast to the weeks before the two summer increases. That suggests either that there will be no rate hike Tuesday or that the issue is clouded and a decision will not be reached easily.
"My guess is that they will move, but I wouldn't bet a lot of money. It's a tight, tough call," said Wayne M. Ayers, chief economist at Fleet Boston Corp. "A case can certainly be made both ways -- and probably will be at the Federal Open Market Committee meeting."
Joel L. Naroff, chief economist at Commerce Bancorp. in Cherry Hill, N.J., also thinks the Fed will notch up its target for the federal funds rate another quarter percentage point on Tuesday, to 5.5% from 5.25% now. But if it does not, he said, he feels even more certain that a rate hike at the committee's meeting on Nov. 16 would remain a live option.
Though still strong, the economy is already slowing in important ways that will be more apparent by next spring, the economists said. Another rate hike after those on June 30 and Aug. 24 would accentuate that process.
It could bring into play the "three steps and stumble rule" -- that a trio of upward rate moves by the Fed is enough to slow the economy significantly, perhaps even to the brink of recession, though few are predicting an outright downturn next year.
Nearly all Fed watchers think the central bank would go on hiatus after a third rate hike, pausing until late winter or spring to assess whether the economy has in fact cooled enough to thwart inflationary pressures.
Right now, the signs of slowing are concentrated in housing and real estate and are surrounded by evidence of strength elsewhere, notably in the job market and retail sales. But housing is a crucial component of the economy, with major ripple effects in many other sectors. It is also psychologically important, playing a key role in consumer confidence.
"The Fed appears to be relying on the housing sector to slow the overall economy," said Mr. Shepherdson, who cited a recent slump in mortgage applications. By spring, the drag from a slower real estate market could be far more visible, he said.
Meanwhile, a pair of Fed moves and the threat of another have also been enough to clamp a lid on the bull market in stocks. The Dow Jones industrial average hit its all-time high of 11,326.04 on Aug. 25, the day after the last Fed move but has since surrendered nearly 1,000 points.
Mr. Greeenspan, who has criticized "irrational exuberance" among investors is probably not displeased by what has happened on Wall Street, but bank stock prices have borne the brunt of the change in market sentiment. The Standard & Poor's bank index slid 17.4% in the third quarter.
"The Fed's objective is to cool down the economy and create another soft landing, a slowdown without a recession, and in stocks, to let the air out slowly," said Lawrence W. Cohn, the veteran bank stock analyst who is research director at Ryan, Beck & Co. of Livingston, N.J.
"So far, the Fed has been successful," he said, "but it is no fun being in the equity market while they're doing this."