Monday, September 03, 2007

Fed keeping an eye on the economy

Despite all the chatter about the financial market turmoil and so-called credit crunch, the Fed will be keeping a watchful eye on the real economy to determine whether a rate cut may be necessary at the next two FOMC meetings. At this stage there are no economic signposts pointing to recession. The real economy is probably still poking along somewhere in the 2.25% to 2.75% annualized real GDP growth range, neither booming nor busting. Despite the chatter, a Fed rate cut is unlikely and will remain unlikely. There would have to be some significant deterioration in the real economy for that to change.

One difficulty for both the Fed and market participants is that even most economic reports that come out over the next couple of weeks are still backwards looking and reflect conditions and expectations before the "crisis" in the middle of August. For example, the monthly employment report due out on Friday is nominally for August but actually covers the period only up through the second week of August, so it will not give us any insight into employment trends since the "crisis."

We do have weekly unemployment insurance claims reports, but even the latest report shows initial claims at 334,000 and a 4-week moving average of 324,500, well under the 400,000 level that is normally indicative of a contracting economy.

Weekly mortgage applications are down somewhat but still at a reasonable level considering all the angst about the housing market.

In his speech on Friday, Bernanke told us that "we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country." Ultimately, it is the Fed's business and banking contacts in the twelve Federal Reserve districts around the country who will have veto authority over whether the Fed hears that the economy is either holding up "okay" or or showing serious signs of crumbling.

Not everyone on Wall Street swarms back to work the day after Labor Day. The first couple of weeks in Spetember are a great vacation time when the Summer crowds have dwindled. So, don't expect Wall Street to kick into high gear until after the middle of the month. In fact, this particular month, don't expect Wall Street to settle down until a full week after the Fed FOMC meeting on September 18, 2007. 

-- Jack Krupansky

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