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Wall Street Cautious Ahead of Wednesday’s Fed Report

11 August 2009 - News - Editor

While private sector economists are beginning to express confidence that the end of the recession may very well be in sight for the US, they also acknowledge that economists and policymakers at the Federal Reserve may not share this viewpoint as they meet on Tuesday and Wednesday this week to review the state of the country's economy and other related matters. It is likely that Wall Street will remain cautious ahead of the preliminary report-back from the Fed on Wednesday, although many are of the opinion that signs of economic recovery will start to become evident before the end of the year, and even possibly by the end of the third quarter in September.

Last week saw investor confidence being boosted by positive data from the US housing market, with pending home sales at its highest level in two years and residential construction showing an increase. A report by the Labor Department on Friday noted that 247,000 workers lost their jobs in July, with the unemployment rate falling to 9.4% and not increasing to 9.7% as predicted. A cause for concern however, is the fact that unemployment levels are remaining high for an extended period of time, and many Americans are really feeling the pinch as their unemployment benefits run out. This is having a ripple effect on credit card companies and financial institutions with an ongoing rise in delinquency levels. On the other hand, US banks are expected to collect a record $38.5 in overdraft fees, according to information released by research company Moebs Services. The report further indicated that fees paid by 10 percent of consumers accounts for close to 90 percent of this figure, and these consumers come from the ranks of rich, poor, male and female, all with a credit score below 590.

Analysts agree that, as the Central Bank of the country, the Fed is unlikely to appear as upbeat about economic recovery as private sector economists. There are a number of reasons being cited for this, including that economists and investors may take an overly optimistic outlook as being a sign that higher rates are imminent, which in turn could cause the rates on Treasurys to rise. Inflation concerns also persist, driven by the multi-faceted $1 trillion expansion of Federal Reserve activity, including loans to commercial banks and Wall Street firms; the buying of Treasurys; the buying of Freddie Mac and Fannie Mae debt and mortgage-backed securities. It is expected that Federal Reserve chairman Ben Bernanke will repeat his assurances of the Fed’s ability to withdraw gradually from these commitments, but it is unlikely to give any details. With speculation rife, investors will no doubt be looking forward to some clarity from the Federal Reserve report on Wednesday.

 


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