What a difference six weeks makes — right before the last Federal Reserve meeting, investors were worried about the global banking system imploding. Now, investors are betting the credit markets are on the mend and Wall Street is looking forward to an economic recovery.
But the market wants to hear this week that the Fed is confident, too.
The central bank’s policy makers meet Tuesday and Wednesday to decide whether to lower interest rates again, and to issue an updated assessment of the U.S. economy and financial system. Most investors believe the Fed will lower rates by another quarter-point but will also suggest they are gearing up for a pause.
“There’s enough mixed signals out there that now’s the time to put that forward,” said Kurt Karl, chief U.S. economist at Swiss Re, referring to mediocre-but-not-horrific readings on the economy and corporate profits that have helped bring some stability to the stock market.
Already, the central bank has incrementally reduced the key rate by 3 percentage points since last summer, to 2.25 percent from 5.25 percent. On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to mail out tax rebates.
“There’s just an awful lot in the pipeline, and it takes time to work,” Karl said. Rate cuts at the federal level typically take at least six months to start affecting the broader economy.
But while Wall Street finally appears ready to hear that rates might stay put, a halt to rate cuts would not be a completely positive sign. Sure, it would suggest that the Fed believes economic risks are easing, but it would also indicate the central bank is growing more worried about the threat of inflation.
It is not uncommon for inflation to flare up in the early part of a recession, and then pull back as the economy weakens further. But considering how high prices are for basics like wheat, rice, corn and gasoline, the market faces a situation where consumers’ discretionary spending could be dampened until there’s a significant shift in the commodities markets.
Last week, crude oil surged to a record close to $120 a barrel, while the average roadside price of a gallon of gasoline climbed to an all-time high near $3.60.
So in addition to the Fed’s meeting, Wall Street will continue to examine earnings from consumer-focused brands like Kellogg Co., Procter & Gamble Co., and Colgate-Palmolive Co., as well as economic data.
The government reports Thursday about personal spending, and Friday about employment — the biggest driver of spending. Economists surveyed by Thomson Financial/IFR expect the government to say personal spending rose by 0.3 percent in March, but that payrolls dropped by 75,000 in April and unemployment rose to 5.2 percent.
Last week, several companies released results and forecasts that disappointed investors — including Microsoft Corp., 3M Co., Motorola Inc. and Bank of America Corp. — but there were upbeat surprises, such as Boeing Co.’s earnings., that provided some relief.
The Dow Jones industrial average finished the week up 0.33 percent, the Standard & Poor’s 500 index ended up 0.54 percent, and the Nasdaq composite index rose 0.83 percent.