All eyes will be on the Federal Reserve this week, as its policy committee sits down to discuss the Fed’s increasingly unconventional strategy for shoring up the financial markets and arresting the economy's slide. Economists currently expect the policymakers to cut the target interest rate on the overnight funds banks trade with each other from 1% to 0.5%. The trouble is, the markets may have a difficult time finding any meaning in such a cut. Since Dec. 4, overnight funds have been trading at a market rate of 0.06% -- effectively zero and nowhere near the current 1% target.
The markets will be looking for greater transparency in the Fed’s actions in recent weeks and what the target of Fed policy actually is right now. In particular, the markets want to know if the Fed is moving toward a formal program of quantitative easing, which basically floods the banking system with more funds than are required to hold the target rate at a given level. This strategy, commonly referred to as “printing money,” was last implemented by the Bank of Japan in an effort to pull the Japanese economy out of its deflationary downturn.
The Fed’s actions since the bankruptcy of Lehman Brothers suggest policymakers are moving in this direction. Up to then, the impact on the target rate of the rush of new funds created by the Fed’s various lending facilities had been offset by the Fed selling some of its Treasury bills. After the Lehman debacle, the Fed stopped doing that, and funds began to flood the overnight market pushing the overnight rate close to zero.
More funds are on the way. The Fed is about to begin a program to buy up to $600 billion in debt and mortage-backed securities from Fannie Mae (FNM), Freddie Mac (FRE) and the Federal Home Loan Banks, funds that will also flow into the system. And it has also hinted it will begin outright purchases of longer-dated Treasury notes in a direct attempt to push down interest rates further out on the yield curve. Much of the Fed’s recent actions have been without discussion within the policymaking Federal Open Market Committee, which includes not only the Federal Reserve Governors but district Fed Presidents as well. The Dec. 16 meeting will give the regional officials a chance to weigh in on the Fed’s increasingly radical actions.
Aside from the Fed, market attention will be focused on a few economic reports this week. Industrial production on Monday should continue to show cutbacks in factory output in November, signaled by the 12% drop in factory orders from August to October, the largest three-month drop on record. November consumer prices on Tuesday will show another large drop, reflecting a further slide in energy prices. Also on Tuesday, look for more bad news on November housing starts.
Here’s the weekly economic calendar, from Action Economics:
|Reports||Date||Time||For||Median Estimate||Last Period|
|Empire State Index||Monday, Dec. 15||8:30 a.m.||December||-25.0||-25.4|
|Industrial Production||Monday, Dec. 15||9:15 a.m.||November||-0.5%||1.3%|
|Capacity Utilization||Monday, Dec. 15||9:15 a.m.||November||76.0%||76.4%|
|Consumer Price Index||Tuesday, Dec. 16||8:30 a.m.||November||-1.0%||-1.0%|
|Consumer Price Index (Excluding Food & Energy)||Tuesday, Dec. 16||8:30 a.m.||November||0.1%||-0.1%|
|Housing Starts (Millions)||Tuesday, Dec. 16||8:30 a.m.||November||0.745||0.791|
|Current Account ($Billions)||Wednesday, Dec. 17||8:30 a.m.||Q3||-$179.6||-$183.1|
|Philly Fed Index||Thursday, Dec. 18||10:00 a.m.||December||-38.3||-39.3|
|Leading Indicators Index||Thursday, Dec. 18||10:00 a.m.||November||-0.5%||-0.8%|
|Treasury International Capital Data||Monday, Dec. 15||9:00 a.m.||October|
|National Association of Home Builders survey||Monday, Dec. 15||1:00 p.m.||December|
|EARNINGS: Goldman Sachs (GS)||Tuesday, Dec. 16|
|EARNINGS: Best Buy (BBY)||Tuesday, Dec. 16|
|EARNINGS: Adobe Systems (ADBE)||Tuesday, Dec. 16|
|ICSC-UBS Store Sales||Tuesday, Dec. 16||7:45 a.m.||Dec. 7-13|
|Johnson Redbook Weekly Store Sales||Tuesday, Dec. 16||8:55 a.m.||Dec. 7-13|
|Federal Reserve FOMC policy meeting||Tuesday, Dec. 16||2:15 p.m.||statement|
|EARNINGS: Morgan Stanley (MS)||Wednesday, Dec. 17|
|EARNINGS: General Mills (GIS)||Wednesday, Dec. 17|
|EARNINGS: ConAgra Foods (CAG)||Wednesday, Dec. 17|
|EARNINGS: Nike (NKE)||Wednesday, Dec. 17|
|EARNINGS: Paychex (PAYX)||Wednesday, Dec. 17|
|Mortgage Applications||Wednesday, Dec. 17||7:00 a.m.||Dec. 7-13|
|EARNINGS: Lennar (LEN)||Thursday, Dec. 18|
|EARNINGS: Discover Financial Services (DFS)||Thursday, Dec. 18|
|EARNINGS: FedEx (FDX)||Thursday, Dec. 18|
|EARNINGS: Oracle (ORCL)||Thursday, Dec. 18|
|EARNINGS: Darden Restaurants (DRI)||Thursday, Dec. 18|
|EARNINGS: Carnival (CCL)||Thursday, Dec. 18|
|Initial Unemployment Claims||Thursday, Dec. 18||8:30 a.m.||Dec. 7-13|
|SPEECH: Dallas Fed President Fisher||Thursday, Dec. 18||1:30 p.m.|
|EARNINGS: Cintas (CTAS)||Friday, Dec. 19|
|EARNINGS: Jabil Circuit (JBL)||Friday, Dec. 19|