Wall Street to Fed: Leave rates alone

By controlling a key short-term interest rate, the Federal Reserve aims to keep the economy humming. It might raise rates to rein in inflation or lower rates to spur growth. A reduction in rates generally cheers stock investors. It makes bonds a less attractive alternative and lowers borrowing costs.

The stock market's reaction to other Fed moves is harder to predict. Since 2004, the Fed's Open Market Committee has issued 26 policy statements. When there was no interest-rate action, the markets moved up seven of nine times. Surprisingly, it also rose eight of 17 times when the Fed raised rates from June 30, 2004, through June 29, 2006.

"What the market hates is uncertainty, and a lot of times, the Fed's statement has done nothing to alleviate uncertainty," says Lincoln Anderson, chief investment officer and chief economist at LPL Financial Services. "As long as the Fed is clear about its direction, stocks can rise."

Anderson notes that the market has risen more frequently on the day of the Fed's policy statements since Fed Chairman Ben Bernanke took over from Alan Greenspan last year. "Bernanke is just plain old transparent," Anderson says.

"That's made it a lot easier for the market to figure out what's going on."