The Federal Reserve could soon drop a bombshell, slapping investors with a bigger than expected rate increase at the December 13 meeting of the Federal Open Market Committee.

This bleak just-issued forecast comes from the chief economist of Standard & Poor’s, David Wyss, whose outlook for next month’s meeting calls for a hike of 50 basis points, not the widely anticipated 25 points, a move that would boost the federal funds rate to 4.5%.

Although Mr. Wyss believes his projected 50-point increase would signal the end of the current tightening cycle – which has produced 12 consecutive rate hikes since June 2004 – some Wall Streeters say it would nonetheless scare the dickens out of the market since almost no one expects a jump of that magnitude at this juncture.

The overriding view is that there are only two more rate hikes to go, on December 13 and January 31, each 25 basis points, and that’s it for this tightening cycle.

“If the Fed were to raise rates 50 basis points on December 13, you wouldn’t want to own stocks that day,” a Los Angeles day trader, Arnold Silver, said. “It would infer the Fed is far more concerned about inflation than they’ve let on.” Such a rise, he believes, would also knock the Dow down at least 100 points and abruptly end the current rally.

He further argues a 50-point boost would radically alter Wall Street’s sunnier rate outlook. Giving credence to such an outlook was last Tuesday’s disclosure of minutes from the November 1 meeting of the Federal Open Market Committee, indicating a possible shift in monetary policy to less restraint.

Those minutes sounded great for the stock market, and indeed enthusiastic investors responded last Tuesday with a buying binge, pushing up the Dow that day more than 51 points and nearly another 45 points the following day.

Not everybody, though, buys this happy rate talk. One skeptic who doesn’t is money manager Leonard Mohr of Los Angeles-based MCR Associates. “To believe the Fed is just about through raising rates,” he says, “is to believe in the tooth fairy.”

He’s convinced the incoming Fed chairman, Ben Bernanke, will push for another rate boost at his inaugural March 28 FOMC confab, likely 25 basis points, but perhaps 50 basis points if the economy heats up any more.

Further, he observes, no one should ignore the mood of FOMC members, which, though somewhat dovish in the recently issued Fed minutes, was unquestionably hawkish among key policymakers, including Chairman Alan Greenspan, in their recent Joint Economic Committee testimony. What’s more, he feels Mr. Bernanke, who is generally seen as being likely to adhere to the policies of his predecessor, is unlikely to buck that strong hawkish sentiment, especially at his very first FOMC meeting.

“The market thinks it’s out of the woods as far as rate increases go, but I think that’s a pipe dream,” he says.

The latest from Merrill Lynch is it expects its projected rise in the fed funds rate to 4.5% will end the current tightening campaign, but its North American economist, David Rosenberg, says a look back at the history books raises the possibility the Fed will go on boosting rates beyond the firm’s official forecast. In this context, he notes, of five newly named Fed chairmen over the past six decades (excluding Mr. Bernanke’s appointment), each one, save for Arthur Burns, raised rates as his very first move. Apparently, he says, new central bank chairmen like to establish their anti-inflation credentials from the very beginning.

The general Wall Street view is that the fed funds rate will finish the first half of 2006, if not the full year, at about 5%, but money manager Raymond Stahler of London-based Stahler Dearborn, Ltd., rates such an outlook as “remarkably naive.” Pointing to a number of factors that lead him to conclude that “5% is simply too low” – chief among them growing inflation, good economic growth, high energy prices, big trade and budget deficits, and an upturn in consumer confidence – Mr. Stahler says he would be astonished if the fed funds rate wasn’t at 6% or higher by the end of the first half or early in the second half.

Strategist Bill Rhodes of Boston based Rhodes Analytics views the current 4% fed funds rate as very high. “I’m very concerned about the Fed,” he says, describing it as “the market’s public enemy no. 1” in its efforts to drive rates higher to ease the economy. The Fed, he also fears, could make a real policy error in real estate. “If you crack housing, you could affect the economy very badly, possibly,” he says, “even throw us into a recession.”