Vital Signs: Steady Rates Seen from the Fed

On deck: The Fed meets, industrial production, consumer prices, homebuilders survey, housing starts, leading indicators index, and data on household and corporate balance sheets

The Federal Reserve's policy meeting on Tuesday takes center stage this week. Economists surveyed by Action Economics are unanimous in expecting no change in the Fed's 2% target interest rate, and betting in the futures markets implies an 85% chance policymakers will hold the rate steady through yearend, with a small probability of a rate cut. Those odds are sharply different from those a couple of months ago, when the markets were starting to build in expectations of a rate hike. That was before the troubles at the mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) began to push mortgage rates higher and before the labor markets started showing signs of serious weakness.

The U.S. government takeover of Fannie and Freddie will help get mortgage rates down and spur some new lending, but the Fed now faces a new problem: Worries about commodity-driven inflation have given way to concerns about jobs and the economy. The unemployment rate surged to a five-year high in August, and it has now risen 1.2 percentage points since January, with half of that increase coming in only the past two months. It will go higher.

The economy is not growing fast enough to prevent continued job loses, and growth in the second half is shaping up to be weaker than in the first half. Many economists now look for the jobless rate to peak between 6.5% and 7% next year, well above the 6.3% apex reached in the 2001 recession. Job losses only work against the benefits of the Fannie/Freddie action, since they cut further into income growth, depress home demand and spending generally, and push more mortgages into default.

The Fed's policy statement, due at 2:15 p.m. on Tuesday, will most likely show a shift toward more concern about the economy and less worry about inflation, although Fed watchers generally believe the policymakers will stop short of signaling they are leaning toward a rate cut. The inflation outlook has improved greatly in recent weeks: Weak labor markets are putting more downward pressure on hourly wages. Oil prices have dropped sharply. The dollar continues to strengthen. And surprisingly strong growth in productivity is holding down unit labor costs.

All of this has sharply reduced inflation expectations, based on the difference between the 10-year yields on Treasury notes and Treasury Inflation Protected Securities, which hit a five-year low in early September. The impact of falling energy prices on inflation will begin to show up in the August consumer price index, due on Tuesday.

Rounding out the week's top economic reports, look for data on August industrial production on Monday, housing starts on Tuesday, and the leading indicators index on Thursday. Also on Thursday, the Fed's quarterly flow of funds data will lay out household and corporate balance sheets for the second quarter. Falling home values have been taking a toll on consumer wealth in recent quarters, and the flow of funds report will provide an update on the extent of the losses.

Here's the weekly economic calendar from Action Economics.

Top Economic Reports
Reports Date Time For Median Estimate Last Period
Empire State Index Monday, Sept. 15 8:30 p.m. September 2.0 2.8
Industrial Production Monday, Sept. 15 9:15 a.m. August -0.2% 0.2%
Capacity Utilization Monday, Sept. 15 9:15 a.m. August 79.7% 79.9%
Consumer Price Index Tuesday, Sept. 16 8:30 a.m. August 0.1% 0.8%
Consumer Price Index, ex-food & energy Tuesday, Sept. 16 8:30 a.m. August 0.2% 0.3%
Housing Starts (mil) Wednesday, Sept. 17 8:30 a.m. August 0.957 0.965
Current Account Balance ($bil) Wednesday, Sept. 17 8:30 a.m. Q2 -$179.7 -$176.4
Philadelphia Fed Index Thursday, Sept. 18 10 a.m. September -9.7 -12.7
Leading Indicators Index Thursday, Sept. 18 10 a.m. August 0.1% -0.7%

Other Reports and Events:

EARNINGS: Pall - Monday, Sept. 15

ICSC-UBS Store Sales - Tuesday, Sept. 16

Johnson Redbook Weekly Store Sales - Tuesday, Sept. 16

National Association of Home Builders Survey - Tuesday, Sept. 16

Treasury International Capital Report - Tuesday, Sept. 16

Federal Reserve Policy Meeting - Tuesday, Sept. 16

EARNINGS: Goldman Sachs - Tuesday, Sept. 16

EARNINGS: Darden Restaurants - Tuesday, Sept. 16

EARNINGS: Adobe Systems - Tuesday, Sept. 16

EARNINGS: Best Buy - Tuesday, Sept. 16

EARNINGS: Kroger - Tuesday, Sept. 16

Mortgage Applications - Wednesday, Sept. 17

EARNINGS: Morgan Stanley - Wednesday, Sept. 17

EARNINGS: General Mills - Wednesday, Sept. 17

Initial Unemployment Claims - Thursday, Sept. 18

Flow of Funds Data - Thursday, Sept. 18

EARNINGS: FedEx - Thursday, Sept. 18

EARNINGS: Oracle - Thursday, Sept. 18

EARNINGS: ConAgra Foods - Thursday, Sept. 18

SPEECH: Chicago Fed President Evans - Friday, Sept. 19