The Federal Reserve is back in the spotlight this week. After the Fed's emergency half-point cut in its target rate to 1.5% on Oct. 8, the markets almost fully expect another half-point reduction at the Wednesday conclusion of the Fed's two-day meeting on Oct. 28-29. Policymakers are trying to put additional stimulus into the economy in advance of what's shaping up to be a traditional economic recession with successive quarterly declines in economic activity, as measured by real gross domestic product.
Given the sharp deterioration in much of the economic data in recent weeks, combined with the anticipation of heavy economic fallout from the recent market upheaval, futures markets are betting on a 96% probability of a half-point cut in the Fed's overnight federal funds rate. If that's the case, the target rate would fall to 1%, the lowest since June, 2003. Fed chairman Ben Bernanke's downbeat remarks to Congress on Oct. 20 only reinforced those expectations. Look for the Fed's policy statement to hit the newswires at 2:15 p.m. on Oct. 29.
Much of the week's economic data will be for September, prior to the brunt of the impact of the credit-market freeze and stock-market collapse following the bankruptcy of Lehman Brothers on Sept. 15. Still, September reports on new home sales, durable goods orders, and personal income and spending will be interesting for what they say about the economy's trajectory before the market turmoil. It's already becoming clear from much of the data that the economy was slowing sharply even before September. Both consumer buying and capital spending by businesses showed a clear pattern of retrenchment, and data this week are expected to continue that trend. Real GDP for the third quarter is expected to post a slight decline, based on the average projection of economists surveyed by Action Economics.
October data, as they begin to emerge this week and in coming weeks, will give a better reading on just how badly economic growth will get hit in the current quarter. Survey data from various Federal Reserve district banks are the only hard evidence available for October business activity right now. Activity readings from the Philadelphia and New York Fed districts lurched downward last month. This week, the markets will be looking closely at similar surveys from the Dallas, Richmond, and Kansas City Fed regions. In addition, the Conference Board will offer an October reading of consumer confidence that will fully capture household attitudes following the September calamity.
Right now, economists are generally building in much larger declines in real GDP for their forecasts for the fourth quarter and the following quarter next year. The Fed's past rate cuts, from 5.25% in September, 2007 to 2% in April 2008, should help to cushion the damage, but only if credit markets begin to function normally. Recent dysfunction has prevented much of the stimulus of past Fed easing from getting through the financial system. To the extent that recent global actions get credit flowing again, the Fed already has sufficient stimulus in the system to promote at least a modest recovery later next year. But that's looking across the valley of the recession.
Here's the weekly economic calendar:
Top Reports
Date
Time
For
Median Estimate
Last Period
New Home Sales (millions)
Monday, Oct. 27
10:00 a.m.
September
0.450
0.460
Consumer Confidence Index
Tuesday, Oct. 28
10:00 a.m.
October
53.8
59.8
Durable Goods Orders
Wednesday, Oct. 29
8:30 a.m.
September
-0.7%
-4.8%
GDP (advance)
Thursday, Oct. 30
8:30 a.m.
Q3
-0.2%
2.8%
GDP Chain Price Index (advance)
Thursday, Oct. 30
8:30 a.m.
Q3
3.8%
1.1%
Employment Cost Index
Friday, Oct. 31
8:30 a.m.
Q3
0.7%
0.7%
Personal Income
Friday, Oct. 31
8:30 a.m.
September
0.1%
0.5%
Personal Consumption Expenditures
Friday, Oct. 31
8:30 a.m.
September
-0.2%
0.0%
Chicago Purchasing Managers Index
Friday, Oct. 31
9:45 a.m.
October
50.5
56.7
Consumer Sentiment Index (final)
Friday, Oct. 31
10:00 a.m.
October
57.5
57.5
Source: Action Economics