This week, the Fed speaks, and the market will listen.
After sifting through mixed corporate profit reports and uneven readings on the economy, Wall Street will find out the answer to the long-debated question of whether the Federal Reserve will cut interest rates again.
The market anticipates one more rate cut. Beyond that, it’s a tough call.
The Fed, which meets Tuesday and Wednesday, is in a bind. The credit markets remain squeezed, but energy and food costs are soaring and the dollar is tumbling. The balance between controlled inflation and fluid markets is one the central bank is always trying to preserve, but it’s been a while since the tight rope has looked this precarious.
Most investors expect the Fed will decide tight credit is the bigger risk to the economy and lower rates — a good bet, given how many times U.S. policy makers have said they will help maintain liquidity in the financial markets.
The question, though, is how long the Fed will maintain that stance. Crude oil prices have soared about 50 percent year to date, and the dollar has sunk more than 8 percent versus the euro this year to record lows.
The market is pricing in not only a quarter-point rate cut after the central bank’s Oct. 30-31 meeting, but another one after its Dec. 11 meeting. If the statement that accompanies next week’s decision indicates the Fed is loathe to make borrowing even cheaper because of inflationary risks, stocks could be in for a bumpy ride.
An market rumor Wednesday of an emergency Fed decision before its scheduled meeting led investors to bounce back from steep losses that day. The move exemplified how jittery the stock market has been since the Dow and the S&P hit record highs on Oct. 9.
The stock market is not as temperamental now as it was in late July and early August, but Wall Street is worried about how much more the housing market will deteriorate and whether it will drag down the rest of the economy. Investors are also fretting whether banks and other financial firms are making the right bets to make up for their credit-related losses in the third quarter.
Uncertainty breeds volatility, and the Dow Jones industrial saw several triple-digit swings last week. The Dow ended the week up 2.11 percent; the Standard & Poor’s 500 index advanced 2.31 percent; and the Nasdaq composite index rose 2.90 percent .
Besides the Fed decision, investors this week will also have a heavy dose of economic data to digest. The reports are expected, on the whole, to suggest slow growth and tame inflation.
The Commerce Department on Wednesday releases a reading on third-quarter gross domestic product. The Institute for Supply Management on Thursday reports on October manufacturing, while the Labor Department reports on September personal income, spending and inflation.
And on Friday, the Labor Department releases its October report on the job market — an especially important piece of data, as it signals whether the average American is getting a regular paycheck. If people are losing jobs, they are apt to scale back spending, and may miss home loan and bill payments.
Economists surveyed by Thomson Financial expect, on average, payrolls to have risen by a net 85,000 in October, down from September’s net increase of 110,000. They anticipate the unemployment rate to hold steady at 4.7 percent.
And while the majority of U.S. companies have already released their 3rd-quarter results, there are still some big names on deck. Companies releasing quarterly results this week include Kellogg Co., RadioShack Corp., Colgate-Palmolive, Procter & Gamble Co., Eastman Kodak Co. and ExxonMobil Corp.