For investors who worry about rising interest rates, what comes next may well be the tough part. Despite 11 increases in short-term rates...

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CHICAGO — For investors who worry about rising interest rates, what comes next may well be the tough part.

Despite 11 increases in short-term rates in just over 15 months, members of the Federal Reserve are indicating there will be no quick end to their campaign to tighten credit.

Don’t be surprised if the central bank makes at least two more moves before Fed Chairman Alan Greenspan departs in late January, which would bring its short-term lending barometer to 4.25 percent, said Henry Van der Eb, a Bannockburn, Ill.-based mutual-fund manager.

Other economists say the rate could hit 5.5 percent next year.

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“Greenspan’s parting shot will be to go out as a hard-money anti-inflationist, and he is specifically targeting the housing bubble,” said Van der Eb, of the Gabelli Mathers Fund. “Until now, Greenspan has been far too free with the money supply.”

Recent remarks from Fed policy-makers indicate “the central bank clearly is at the high end of its range for the level of inflation it will tolerate,” Van der Eb said.

For now, stocks continue to tread water. Through the first three quarters of 2005, the Standard & Poor’s 500 index was up slightly, and stocks in the Dow Jones industrial average lost about 2 percent.

A narrow list of stock groups has done the year’s heavy lifting, notably energy stocks, which have soared 40 percent; utilities, which are enjoying a me-too rally; homebuilders; and some health-care stocks. The technology sector has gained about 10 percent, as have small-caps.

Stocks to shun have included banks and other financial issues. Consumer stocks have seen ho-hum results for the year.

And retailers have been torpedoed after Hurricane Katrina, as investors fret about sky-high gasoline costs, which could hamper holiday shopping.

So where should an investor place money now?

Investment manager Brian Wesbury says that despite the many Fed rate increases, stocks remain undervalued by about 30 percent, according to historical measures.

In the months ahead, he sees good investment opportunities in cyclical stocks, including manufacturers.

Wesbury also thinks retail stocks will rebound. “They will come on strong as energy prices come down,” he said.

In recent days, there has been a shift by investors in the direction of large, high-quality growth stocks and away from utilities and energy or materials stocks, said Chicago investment manager Marshall Front.

“People sense that as the Fed takes steps to slow the economy, it’s a good time to hold shares of well-managed companies with prospects of sustained earnings growth,” he said.

That grouping includes major technology companies that have seen their shares erode, even though they are sitting on giant reserves of cash, said Front, of Front Barnett Associates.

“Some of these tech stocks are trading for earnings multiples lower than the overall market,” he said.

Other analysts are cautious and think the Fed could push too hard in raising rates and limiting economic growth.

“Money could shift out of the stock market into fixed-income instruments and certificates of deposit, where there has been no meaningful reward for investors in many years,” said Chicago banker Kenneth Skopec of MB Financial Bank.

He thinks economic uncertainty means that “everybody needs a bit of breathing room” in the Fed’s tightening campaign. In other words, it’s time for the central bank to pause.

Otherwise, Skopec said, “there is no question that higher rates will inevitably harm the construction industry.”

Fund manager Van der Eb says investors will have more worries as winter sets in.

“We could find ourselves with $4 gasoline and heating bills that go through the roof,” he said.