It’s no longer a question of if the Federal Open Market Committee will cut short-term interest rates when it meets on Tuesday. Thanks to last week’s appearance before the Senate Budget Committee by Fed Chairman Alan Greenspan, it’s only a question of how much of a cut will be made. If interest rates on 30-year bonds are any indication, it could be a whopping cut of 0.50 percentage point. In recent years, the market has led the Fed rather than following it. On Friday, the yield on the bellwether 30-year Treasury bond hit a record closing low of 5.11 percent as concerns about Asia, Latin America and Russia mounted. By contrast the federal-funds rate, which is charged on overnight loans and was last changed in March 1997, is 5.5 percent. Since late April, rates on the 30-year bond have fallen from 6.07 percent. Carl Tannenbaum, chief economist for LaSalle National Bank, however, said he believes Greenspan will be hard-pressed to get the committee to agree to a 0.25 percentage point cut, let alone one twice as big. “Greenspan has to reach a consensus with 12 angry men and women that this is the right thing to do,” Tannenbaum says. Fortunately for the stock market, the odds are that Greenspan will win the argument.
HOME SALES
STEADY STRENGTH
Just because sales of existing homes fell in August, don’t look for new-home sales to drop any time soon. New-home sales have been hovering just below 900,000 units each month since April; Wednesday’s report won’t change that, according to Steven Wood, an economist with BancAmerica Securities. Wood estimates that August sales hit 885,000. “Sales of new homes will remain high so long as the gains that households experience from strong employment and income growth continue,” Wood said.
PURCHASING
SOME SOFTENING LIKELY
The Chicago purchasing managers index, which unexpectedly dropped last month by more than 8 points to 49.3, is due out Wednesday.
“We’re expecting Chicago to come in at about 50, which is neutral, but that is an improvement over last month,” said Tannenbaum. After all, says the LaSalle bank economist, “If Brazil falls, Mexico could then fall; and Canada is having its own problems. That’s when the paper losses on the stock market will translate into job losses in the economy.”
While the Chicago purchasing managers report could show a small increase, Thursday’s report by the National Association of Purchasing Management could show the economy continuing to soften. Tannenbaum said he’s looking for a reading of about 49, while Wood says he’s looking for about 49.5. A figure below 50 indicates a contracting economy.
Last month the survey came in at 49.4. Six months ago, the survey was at 54.8. Tannenbaum says the national survey’s softness is tied directly to the problems on the coasts. “The two coasts, East Coast and West Coast, have suffered a lot more due to the huge trade deficit. We are close to fresh water, and the local economy is slightly less vulnerable,” Tannenbaum said.