"The norm is not for the Federal Reserve to begin raising rates while unemployment is still an issue," says Quincy Krosby, chief investment strategist for The Hartford. "The Federal Reserve is going to watch the consumer's behavior and the ability of the consumer to get jobs before they begin the upward path of removing liquidity. I think it is premature for the market to obsess about the Fed."
The economy also is suffering through a period of decreasing capacity utilization, and few other signals have shown an actual improvement in conditions, only a lessening in deterioration.
"In that sort of environment there is no fundamental case for tightening credit," Jan Hatzius, chief economist at Goldman Sachs, said on CNBC.
Getting Back to Normal
To be sure, a rise in rates is not universally dreaded.
Moving interest rates back to pre-credit crisis levels, in fact, would more closely represent where the market should be and thus provide confidence that things are going back to normal, says Tom Sowanick, chief investment strategist at Clearbrook Investment Consulting in Stamford, Conn.
"Everybody's fearful the Fed is going to tighten," he says. "The terminology is wrong. It's 'normalize.' "
Investors will be watching Fed Chairman Ben Bernanke for the central bank's direction, but Sowanick believes the central bank will provide sufficient warning that investors will act accordingly ahead of time.
"Bernanke has been pretty clear that we need to put discipline back into the system," Sowanick says. "When he says that he's not just leaving it at fiscal discipline, I think there's monetary discipline that he's also referring to."
Under the mentality, companies with strong capital positions and low leverage could be expected to perform best. Sowanick identifies those sectors as materials, technology and industrials.
Still, others feel policy officials have alternatives in their tool kit to stem any inflationary concerns that arise, such as stopping the purchase of Treasurys while continuing to buy mortgage-backed securities.
"You still have an economy where confidence in terms of employment is not back," Krosby says. "I think the Fed is going to realize that the stage is not being set for job creation. To the contrary, in the private sector the stage is being set for business owners to be very cautious."
Yet the idea persists in the markets that the Fed might make a move, and that in itself could cause market gyrations.
"Even the perception of rate hikes matters for the equity markets." Nomura's Pandl says. "To the extent that higher expectations for the fed funds rate translates into higher corporate bond yields, higher Libor, higher mortgage rates--that's a negative for the economy."