Vital Signs: Moment of Truth for the Fed

Bernanke & Co. are expected to lower rates, but by how much? Also on tap: August CPI, PPI, housing starts, and leading economic indicators

The financial markets have been waiting for this moment for quite a while. On Sept. 18, the Federal Reserve meets to discuss monetary policy and everyone on Wall Street expects Bernanke & Co. to trim its target fed funds rate.

Indeed, the latest chatter among Fed watchers has shifted from if and when, to how much. According to a survey of 23 economists by Action Economics, the consensus is that interest rates will be cut from 5.25% to 5% at Tuesday's Federal Open Market Committee meeting, with another quarter-point cut coming in October.

Along with the first move in the target rate since June of 2006, the Fed could once again lower the discount rate -- the rate charged to banks on loans they take out from the Federal Reserve Bank's discount window. On Aug. 17, the central bank lowered the discount rate to 5.75% from 6.25% to alleviate the liquidity squeeze in the financial markets.

In addition to any policy moves, what the Fed writes in its post-meeting press release will be very important. Most interesting will be how policymakers balance the risks of weaker economic conditions, especially in housing, with potential inflationary pressures.

As recently as the Aug. 7 policy meeting, inflation had been the bank's "predominant policy concern." While economic growth is likely the top priority right now, Chairman Ben Bernanke hasn't forgotten about inflation. What's more, the Fed realizes that interest rate cuts now have the potential to produce greater inflation pressures later when financial markets and the economy are on sounder footing.

This tug of war between growth and inflation risks could show up in the consumer price and housing data also coming out this week. Lower energy prices during August should keep a lid on overall inflation, but movements in prices outside of food and energy are more important right now. Core inflation has been gradually easing but, at a yearly pace of 2.2% in July, it's still running a little higher that the Fed would probably prefer.

Meanwhile, housing starts are expected to be even lower, reflecting further pullback in activity and no near-term stabilization in the housing market.

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

Economic Reports
Report Date Time For Median Estimate Last Period
Empire State Index Monday, Sept. 17 8:30 a.m. September 15.0 25.1
PPI Tuesday, Sept. 18 8:30 a.m. August –0.1% 0.6%
PPI (ex-food & energy) Tuesday, Sept. 18 8:30 a.m. August 0.1% 0.1%
CPI Wednesday, Sept. 19 8:30 a.m. August 0.0% 0.1%
CPI (ex-food & energy) Wednesday, Sept. 19 8:30 a.m. August 0.2% 0.2%
Housing Starts (million, annual rate) Wednesday, Sept. 19 8:30 a.m. August 1.33 1.38
Leading Indicators Thursday, Sept. 20 10 a.m. August 0.0% 0.4%
Philadelphia Fed Survey Thursday, Sept. 20 Noon September 0.4 0.0


The New York Federal Reserve Bank's September Empire State Manufacturing Survey is expected to retreat, after holding steady in August. The general business conditions index was 25.1 in August, 26.5 in July, and 25.8 in June. The long run average is 15.

Respondents have reported solid growth in shipments and new orders over the past three months, along with a pick up in hiring in the prior two periods. However, the index is likely to soften with signs of weaker economic activity.

Expectations for the coming six months also were still positive in August. The latest reading was 50.4, from 48.2 in July and 44.1 in June. However, the new orders, shipments, and employment indexes retreated, showing a more subdued optimism for the remainder of the year.


Tuesday, Sept. 18, 9 a.m. EDT - The Federal Reserve's Federal Open Market Committee meets to discuss monetary policy. An announcement by the Fed will come around 2:15 p.m. Every economist polled by Action economics fully expects the central bank will keep interest rates at 5.25%.

Economists will once again concentrate on the post-meeting press release to see if the Fed is feeling any different about the economy in light of the mixed economic data and recent financial turmoil. Fed watchers will also be on the lookout to see if the Fed reiterates that "a sustained moderation in inflation pressures has yet to be convincingly demonstrated."

ICSC-UBS STORE SALES - Tuesday, Sept. 18, 7:45 a.m. EDT

This weekly tracking of retail sales, compiled by the International Council of Shopping Centers and UBS bank, will update buying activity for the week ended Sept. 15. Sales rose for a fourth straight week. In the week ended Sept. 8, sales increased 0.3%, after a 0.2% gain the week before.

The yearly pace of growth ticked back up to a rate of 2.9%, from to 2.3% in the prior period. The recent figures show that consumers are not pulling back yet in response to the financial market troubles and signs of a softer economy.

PRODUCER PRICE INDEX - Tuesday, Sept. 18, 8:30 a.m. EDT

Price pressures on businesses are expected to recede a little in August. In July, the PPI surged 0.6%, after a 0.2% dip in June. The turnaround was caused by a 2.5% surge in energy costs, after a 1.1% fall in June.

The yearly pace of wholesale prices is bouncing around with movements in energy, with a 4% increase in July, from 3.3% in June, and 4.1% in May.

However, producer prices outside of food and energy are showing underlying price pressures are building. On a monthly basis, there was a 0.1% rise in July, after a 0.3% gain in June. However, the yearly pace reached a nearly two-year high of 2.3%, from 1.8% in June and 1.6% in May. But businesses may have a tough time passing on these higher costs as the downside risks to economic growth appear to be rising.

JOHNSON REDBOOK INDEX - Tuesday, Sept. 18, 8:55 a.m. EDT

This weekly measure of retail activity will report on sales for the second week of September, ending Sept. 15. In the first fiscal week, sales were up 1.1% vs. the same period in August. Sales for the entire month of August through Sept. 1 were down 0.5%.

HOME BUILDERS SURVEY - Tuesday, Sept. 18, 1 p.m. EDT

The National Association of Home Builders and Wells Fargo bank will issue the September Housing Market Index. The index measures housing market conditions by surveying builders' on current sales, buyer traffic through model homes, and expectations for sales during the next six months.

Builders see no end in sight to the housing recession. The August headline index fell to its second lowest level on record, which dates back to 1985, at 22. The only month with a lower reading was January of 1991.

All three components tied previous record lows. The index tracking current single-family home sales was 23, down from 24 the month before and equaled the November, 1990, level. Expectations for the coming six months also stood at 32, after dropping to 34 in July. The buyer traffic component declined to 16, which tied the December, 1990, reading.

Prices will only fall further with fewer people looking at homes and government data showing increases in unsold new single-family homes. This will also apply further financial stress on home builders.

MORTGAGE APPLICATIONS - Wednesday, Sept. 19, 7 a.m. EDT

The Mortgage Bankers Assn. releases its mortgage Weekly Mortgage Applications Survey of home buying and refinancing application activity for the week ending Sept. 14. After easing in prior few weeks, the purchase index climbed back to a four-week high of 448 for the week ended Sept. 7, from 425.8 in the prior period. The refi index also hit a four-week high, reaching 1876.6 in the latest week, from 1770.2 in the week ended Aug. 31.

The four-week moving average for the purchase index fell 1%, to 434.8 from 439 in the week ended Aug. 31. The refi index also fell with a reading of 1795.7 following a decline to 1808.9. The average interest rate for a 30-year fixed-rate mortgage plunged to 6.25%, from 6.42%.

CONSUMER PRICE INDEX - Wednesday, Sept. 19, 8:30 a.m. EDT

Consumer prices are not expected to budge in August. Back in July, the consumer price index slowed with a 0.1% monthly gain, after a 0.2% rise in June and a 0.7% jump in May. The recent monthly cooling is led by a decline in energy prices, which fell 1% and 0.5% in July and June, respectively.

On a yearly basis, inflation eased back to 2.4% in July, after running at 2.7% in the prior two months. If the consensus view for August is right, there would be a further slowdown in the yearly pace of inflation.

Price pressures should remain about the same outside of food and energy. Core inflation is forecast to rise by 0.2% for a third straight month. Rents and owner's equivalent rent (based on the imputed rental value of owner-occupied housing), are both easing, as are increases in recreation prices.

On a yearly basis, core inflation has been gradually calming down to a pace of 2.2% in July from a recent high of 2.9% in September, 2006. The annual pace of rents was 4.2%, from a recent peak of 4.6% in March, while owner's equivalent rent slowed to 3.1% in July after running at 4.3% as late as January.

REAL EARNINGS - Wednesday, Sept. 19, 8:30 a.m. EDT

Inflation-adjusted weekly earnings of production workers probably edged a little higher. There was a 0.3% increase in average weekly earnings and the consensus forecasts among economists for consumer prices in August is 0.2%, implying a 0.1% gain in inflation-adjusted earnings for August. Real earnings dipped 0.1% in July, after a 0.6% jump in June. Compared to the same period a year ago, inflation-adjusted earnings kept running at a 1.3% pace for a second straight month.

NEW RESIDENTIAL CONSTRUCTION - Wednesday, Sept. 19, 8:30 a.m. EDT

Housing starts are expected to keep falling in August. The annual pace of starts took another leg lower, to an annual rate of 1.38 million in July, from 1.47 million in June. The latest level was the smallest since early 1997. From a year ago, starts are off 20.9%, from 19.2% in June.

Housing authorizations, a precursor to starting construction, kept falling in July, to an annual pace of 1.39 million, from 1.41 million the month before. On a yearly basis authorizations were off 21.7%. Authorizations are currently at the lowest level in over ten years as well. Conditions may get worse for builders. Tighter mortgage lending standards and downward pressure on home prices due to a huge level of inventories, could cause further belt tightening.

JOBLESS CLAIMS - Thursday, Sept. 20, 8:30 a.m. EDT

Jobless claims moved a little higher with a tally of 319,000 in the week ended Sept. 8. In the prior week initial claims stood at a downwardly revised 315,000, from the originally reported level of 318,000. The four-week moving average eased back to 324,000, from 325,000 in the week ended Sept. 1. Continuing jobless claims, which run a week behind the initial claims figures, stood at 2.59 million for a second straight period.

LEADING INDICATORS - Thursday, Sept. 20, 10 a.m. EDT

The Conference Board's composite index of leading economic indicators is expected to hold steady in August, but there's some downside risk to the consensus forecast. The July index rebounded 0.4%, after slipping -0.3% in June. On a yearly basis, the index was up 0.4%.

The July gain was led by a rise in consumer expectations as well as an increase in the Institute for Supply Management's vendor performance index. A higher vendor performance index can indicate more bottlenecks and delays in deliveries because vendors can’t keep up with the activity. A smaller level of initial claims and further gains in stock prices also contributed to the gain.

However, those positive components for July will be drags on the August index reading. In particular, stock prices and consumer sentiment fell sharply in August.

PHILADELPHIA FED SURVEY - Thursday, Sept. 20, Noon EDT

The Philadelphia Federal Reserve Bank's September factory activity index for the mid-Atlantic region probably edged up slightly, after dropping in the past two months to a reading of zero in August. In June, the index of general business activity was 18.

Producers have kept up production in the past couple months, but orders are cooling off. The new orders index was 7.1 in August, from 11.3 in July and 18.3 in June. As a result, respondents have begun working down unfilled orders with an August level of –2.1. If the orders index eases some more, factories may begin to also pull back on production and hiring. The employment index jumped to 21.2 in August, a nearly three-year high.

Despite the slowdown in demand, respondents expressed even more optimism for the coming six months. Economic and financial developments in the meantime point to a sizable adjustment in attitudes in the September report. The general activity index rose to 36.2, from 30.4 in July. The outlook for shipments did soften a little, but expectations for new orders, employment and capital expenditures were pretty upbeat.

MEETING OF NOTE - Friday, Sept. 21, 8:45 a.m. EDT - Federal Reserve Bank of Philadelphia President Charles Plosser gives the welcoming remarks at the Philly Fed's conference entitled "Recent Developments in Consumer Credit and Payments" in Philadelphia.

Earnings Calendar
Day Companies
Monday Adobe Systems
Tuesday AutoZone, Best Buy, Darden Restaurants, Lehman Brothers Holdings, Kroger
Wednesday General Mills, Morgan Stanley
Thursday Bear Stearns, Circuit City Stores, ConAgra Foods, FedEx, Goldman Sachs, Oracle
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