Three Factors That Will Influence the Fed’s Decision Next Week
- Dec 07, 2007
The past two weeks have provided us with a dizzying array of economic information–new job data, construction spending results, forecasts from Fannie Mae and Moody’s.
And it’s all fueled the ongoing speculation about whether or not the Fed will change the interest rate next week when it meets.
Last week, it looked like that was a strong possibility; and now, economists aren’t so sure.
It is, of course, impossible to know what the Fed will decide. But we can predict some of the key information they’ll likely consider:
- Home Prices. The housing slump will undoubtedly influence
the Fed’s decision, even though it will consider housing along with
other government reports and data–and gauge its own housing data
against that of the private sector.
The government index "has continued to rise" while other home price data showed a decline, as BusinessWeek.com reports. Therefore, the source of the housing information that the Fed considers will be extremely important.
The federal government index is a national index–and yet, does not
include higher-priced homes and homes financed via riskier mortgages,
according to BusinessWeek.
A strong possibility for the Fed’s consideration: The Standard &
Poor’s/Case-Shiller nationwide housing index. Based mainly on major
metropolitan areas and including an array of property prices, the index
reported a 4.5 percent price drop in the third quarter from 2006.
The Fed is more likely to use the S&P index than one from an
association or other industry analysts such as the National Association
of Realtors because the Case-Shiller index tracks price changes for the
same properties over time, BusinessWeek says.
Others, like the NAR’s, calculate data using different houses sold during a particular month or quarter.
- Today’s Labor Department job report. According to the report, weak performance in the construction, real estate and financial services industries indicated the housing slump is raging on, but the fact the U.S. again added jobs last month–coupled with the unchanged unemployment rate, which economists had expected to rise–showed signs growth might not be crippled by the decline.
Since unemployment greatly influences consumer spending, which has a huge influence on the economy and its growth, the results are important.
However, the employment report could be considered even more influential because it’s the last piece of economic information to be released before the Fed’s meeting. There won’t be anything else to indicate other factors are effecting the economy or to influence interpretation of the results. This is it.
- The proposed interest rate freeze plan. Speculation that the Fed would again cut rates had increased as more negative housing results poured in during November. However, the Bush Administration’s announcement yesterday–outlining a plan to possibly help 1.2 million Americans with adjustable-rate mortgages due for a high reset–may provide the shot of hope the Fed feels the economy needs (in place of a rate cut.)
Federal Reserve Chairman Ben Bernanke expressed support for the plan on Thursday, calling it "a welcome step," according to Reuters.
And the news has already given the stock market a boost. The Dow Jones industrial average was up 1.3 percent Thursday due to the announcement, which market analysts feel could drive stocks up further because it’s a sign the U.S. is addressing the global credit crisis, according to Newsday.
We’ll find out next week how the Fed feels.