Vital Signs: Investors Want More Cuts from the Fed

On tap: Federal Reserve discusses monetary policy, January employment, consumer confidence and new home sales figures, December personal spending

by James Mehring

What's next for the Federal Reserve? The surprise move on Jan. 22, when the central bank slashed the federal funds target rate to 3.5% from 4.25%, hasn't quenched the financial markets' thirst for interest rate relief. Instead, most investors still believe Chairman Ben Bernanke and the Federal Open Market Committee (FOMC) will end their monetary policy meeting on Jan. 30 by announcing another 50 basis-point cut in rates.

Along with the Jan. 22 rate cut, the Fed stated that "incoming information indicates a deepening of the housing contraction as well as some softening in labor markets." Meanwhile, the bank expects inflation to moderate, although it will keep a close eye on the numbers. Along with the timing of the rate cut, this more downbeat assessment raised fears about the health of the economy.

Bracketing the Fed monetary meeting on Jan. 29-30 are several pieces of economic data that will help shape perceptions on whether the labor markets, housing, and the rest of the economy are truly getting sicker.

Before Chairman Bernanke ends the monetary policy meeting, the Fed will have fresh data on new home sales, durable goods orders, consumer confidence, and economic growth for the fourth quarter of 2007. In addition, Automated Data Processing will release its National Employment Report, a measure of nonfarm private employment using anonymous payroll data. Combined, these numbers will show the strength of the economy as it exited 2007, and how businesses and consumers are responding early on in 2008.

After the meeting, the Bureau of Labor Statistics will release its January employment data. Ultimately, this report could be more important than the Fed meeting. Another weak report along the lines of the December’s decline in private nonfarm payrolls and jump in the jobless rate would send the financial markets into panic that a recession is close at hand. Conversely, if the the retreat in January weekly jobless claims are followed by a solid rebound in hiring, investors and Fed officials alike may let out a small sigh of relief.

Amid all the economic data will come another slew of earnings figures. Overall, it will play out to be a very critical week in understanding the health of the U.S. economy.

Here is the weekly economic calendar, Action Economics.