Will a Rate Hike Kill the Rally?

The market struggled to stay in the green ahead of Federal Reserve Chairman Ben Bernanke's address scheduled for Monday evening, prompting the "Fast Money" traders to wonder whether a rate hike could kill the rally.

In recent weeks, Fed hawks received considerable attention, giving rise to speculation that Bernanke may soon change his dovish tone on inflation and signal a rate increase in the next several months.

“The hawks have been getting more press and they are getting Bernanke’s ear indirectly,” said Deutsche Bank Chief U.S. Economist Joseph LaVorgna, who is scheduled to speak about his predictions for the Federal Reserve and the bond market response to the end of QE2 on Monday's "Fast Money" at 5PM ET.

Last week, Minneapolis Federal president Narayana Kocherlakota, a known hawk, predicted that core inflation — excluding food and energy prices — would rise to 1.3 percent by year-end, providing a strong argument for lifting short-term interest rates by half a percentage point. Short-term rates are currently near zero.

Kocherlakota’s comments were followed by even more hawkish statements by Philadelphia Fed president Charles Plosser. He said that inflation could hit 2 percent this year, indicating that it was time for the Fed to head for the easing “exit ramp.”

The hawkish statements were offset somewhat by Friday comments from New York Fed president William Dudley, a known dove. Speaking after the release of better-than-expected March jobs data on Friday, Dudley said “a stronger recovery” was “welcome and not a reason to reverse course.”

So will Bernanke sound more like Dudley or Kocherlakota when he speaks Monday night?

LaVorgna will listen for any change in tone, but he was sticking by an earlier prediction that the Fed would hold off on a rate hike until December. The stock market response to a rate hike, however, was unlikely to wait for the rate hike itself.

“The question is if they will tweak the extended language a bit,” said LaVorgna, referring to the Fed’s statement in March that economic conditions would “warrant exceptionally low levels for the federal funds rate for an extended period.”

“That could surprise the markets,” said LaVorgna.

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