PRINTMarket Update -- Economic Comment
October 10, 2007
The September employment report showed the expected snapback in payroll growth from overstated weakness in August, and this led to a shift in the expected outcome for the October 31 FOMC meeting. When we posted our thoughts about the likelihood of a "snapback" on September 28, Fed funds futures indicated an 88% probability that the Fed would cut the funds rate by 25 basis points to 4.5% at the October 31 FOMC meeting. That probability has dropped to just 36% in response to firm economic data. The revised probability is in line with our current thinking: there is a one-third chance that the Fed will cut the funds rate on October 31st and a two-thirds chance that the Fed will stand pat.
There will be some key economic data reports between now and the October 31 meeting, and these reports are capable of shifting the odds. The reports include retail sales, inflation, and housing data. The Fed will also have the October employment report in hand on October 31, while we plebs will not have access to it until November 2nd. Thus, even if the published data shift expectations squarely one way or the other, there will still be a fair amount of investor uncertainty about the Fed's likely action at the October 31 meeting because the employment report is the Big Kahuna of economic reports.
While the Fed may stay on hold in October, we think the Fed will loosen monetary policy a couple more notches in coming months as the economy slows and core consumer inflation remains inside the Fed's comfort zone. At this time, we do not expect the Fed to have to engage in a marathon easing operation to stave off a recession, but downside risks to economic growth are significant, which means the Fed will have to remain on call.
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