Vital Signs: What Will the Fed Say Now?

On deck: Federal Reserve's policy meeting, home prices and sales, durable goods orders, consumer confidence and personal income

The Fed will command center stage this week, as the markets await the central bank’s policy statement on Wednesday at 2:15 p.m. Fed-watchers are unanimous in expecting no change in the Fed’s 2% target rate, but Wall Street is somewhat anxious about how the statement will portray the policymakers’ balance of risks between recession and inflation. For months, the Fed has shown a clear bias toward actions that would support weak economic growth and fragile financial markets. That attitude appears to have changed.

Recent hawkish remarks by Chairman Ben Bernanke, downplaying the risks to growth while elevating concerns about future inflation, suggest a statement that will place these risks roughly in balance. A balanced assessment of risks would mean the Fed’s next move on rates could be either up or down, depending on how the economic data fall. The statement after the Apr. 30 meeting made a slight shift in this direction, but Fed-watchers expect a more definitive wording this time.

What has the markets on edge right now is the fear that the Fed’s assessment of risks could swing all the way toward making inflation its predominate policy concern. In that case, the policymakers would be signaling that its next move would more likely be a rate hike than a cut. However, that seems unlikely, especially given recent efforts of unnamed Fed officials, via communications with the Wall Street Journal and Financial Times, to tone down market expectations of future rate increases. Bond yields had jumped on Bernanke’s remarks, and the markets had fully priced-in three quarter-point hikes by yearend. Yields and rate expectations have since retreated somewhat.

The stubbornness of overall inflation and the Fed’s increased attention to it are also unnerving stock investors. Eventually, the Fed will have to begin lifting its target rate back to more normal levels consistent with its long-run inflation goal. The stock market’s growing worry is that the Fed may have to begin hiking rates, even in a relatively weak economic climate, in order to protect its credibility and assure that inflation expectations stay down. That’s hardly a growth scenario conducive to a rebound in earnings.

Data this week seem certain to validate that weak climate. On Wednesday, durable goods orders are expected to reflect the factory sector’s malaise and on Thursday look for a slight upward revision to the 0.9% pace of first-quarter GDP growth. The rest of the week’s reports will cluster around housing and consumers. Households are expected to have remained down in the dumps in June, when the two major confidence indexes are reported on Tuesday and Friday. But May’s personal income data should show a big aftertax impact from the rebates.

Sales of new homes, due on Wednesday, had ticked up in April for the first time in six months, but no follow-through in May is expected. Existing-home sales, to be reported on Thursday, have shown clear signs of stabilizing, but inventories remain near a record level, pushing prices down. Look for more bad news on prices on Tuesday from both the S&P Case-Shiller and OFHEO indexes. Talk of Fed rate hikes is already having one negative impact on the housing outlook: Mortgage rates have jumped from 6.1% to 6.4% in only the past two weeks.

Here’s the weekly economic calendar, from Action Economics.

Top Economic Reports
Reports Date Time For Median Estimate Last Period
Consumer Confidence Index Tuesday, June 24 10:00 a.m. June 56.1 57.2
Durable Goods Orders Wednesday, June 25 8:30 a.m. May -0.1% -0.6%
New Home Sales (Millions) Wednesday, June 25 10:00 a.m. May 0.523 0.526
GDP (Final) Thursday, June 26 8:30 a.m. Q1 1.0% 0.9%
GDP Chain Price Index (Final) Thursday, June 26 8:30 a.m. Q1 2.6% 2.6%
Existing Home Sales (Millions) Thursday, June 26 10:00 a.m. May 4.925 4.890
Personal Income Friday, June 27 8:30 a.m. May 0.3% 0.2%
Personal Consumption Expenditures Friday, June 27 8:30 a.m. May 0.6% 0.2%
Consumer Sentiment Index (Final) Friday, June 27 9:55 a.m.. June 56.4 56.7
Other reports and events
Other Reports and Events Date Time For
EARNINGS: Walgreen Monday, June 23  
ICSC-UBS Store Sales Tuesday, June 24 7:45 a.m. June 15-21
Johnson Redbook Weekly Store Sales Tuesday, June 24 8:55 a.m. June 15-21
Federal Reserve FOMC Meeting (First Day) Tuesday, June 24 9:00 a.m.
S&P Case-Shiller Home Price Index Tuesday, June 24 9:00 a.m. April
OFHEO Home Price Index Tuesday, June 24 10:00 a.m. April
Richmond Fed Survey Tuesday, June 24 10:00 a.m. June
EARNINGS: Darden Restaurants Tuesday, June 24  
EARNINGS: Jabil Circuit Tuesday, June 24  
EARNINGS: Kroger Tuesday, June 24  
Mortgage Applications Wednesday, June 25 7:00 a.m. June 15-21
Federal Reserve FOMC Meeting (Policy Statement) Wednesday, June 25 2:15 p.m.
EARNINGS: Bed Bath & Beyond Wednesday, June 25  
EARNINGS: General Mills Wednesday, June 25  
EARNINGS: Monsanto Wednesday, June 25  
EARNINGS: Nike Wednesday, June 25  
EARNINGS: Oracle Wednesday, June 25  
Initial Unemployment Claims Thursday, June 26 8:30 a.m. June 15-21
Kansas City Fed Survey Thursday, June 26 11:00 a.m. June
SPEECH: Fed Vice Chairman Kohn Thursday, June 26 7:30 a.m.
SPEECH: St. Louis Fed President Bullard Thursday, June 26 9:00 a.m.
EARNINGS: ConAgra Foods Thursday, June 26  
EARNINGS: Discover Financial Services Thursday, June 26  
EARNINGS: Lennar Thursday, June 26  
EARNINGS: McCormick Thursday, June 26  
EARNINGS: Micron Technology Thursday, June 26  
EARNINGS: Paychex Thursday, June 26  
EARNINGS: KB Home Friday, June 27
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