Wallstreet on Edge
Wall Street investors left for Labor Day weekend pleased about the prospects of an interest rate cut, but they’re likely to come back wanting more evidence that rates are indeed about to come down. Expect to see some termpered buying on Tuesday morning.
The market has been in better spirits, for the most part, over the past two weeks than in midsummer, when fears that lending troubles would freeze up credit sent stocks tumbling. Although the Fed has injected cash into the banking system and lowered the discount rate - the rate it charges commercial banks for loans - Wall Street’s fears haven’t been completely assuaged. The Dow Jones industrials and Standard & Poor’s 500 finished slightly lower in a week where it plunged and later recovered. The Nasdaq finished the week higher.
Fed Chairman Ben Bernanke has not come right out and declared that a rate cut will happen, but many investors believe he has telegraphed it by saying the central bank will “act as needed.” Traders who bet on the Fed’s next move are not only pricing in a 100 percent chance of a quarter-point rate cut at its next meeting on Sept. 18, but also are pricing in a 100 percent chance of similar move in October.
The Fed has not reduced the benchmark fed funds rate since 2003, when it declined from a low 1.25 percent to 1 percent. Starting in 2004, the central bank made gradual rate increases until the summer of 2006, when it began holding the benchmark rate at 5.25 percent - the highest it’s been since early 2001, but historically, fairly moderate. Investors will be curious to see if the Bank of England and European Central Bank decide to lower rates Thursday. Rate cuts abroad could signal a similar move from the Fed.
Investors also want to know if the U.S. job market, which has been one of the more stable parts of the economy, is holding up. The Labor Department’s report comes out Friday. Economists surveyed by Thomson Financial predict that nonfarm payrolls rose in August, that the unemployment rate held steady at 4.6 percent, and that hourly earnings ticked up by 0.3 percent.