8.9.2007. 12:40:11
Bruised Wall Street investors, facing a suddenly weaker economic outlook, have pinned their hopes on a Federal Reserve rescue.
The stock market was punished over the past week as investors were hit with news that US job creation had stalled in August, and that job gains earlier in the year were less than previously estimated.
With fears rising about a full-blown recession emanating from the US housing slump, the focus has turned to the central bank. But some observers say chairman Ben Bernanke may not be as willing to ease credit as the market expects.
Slump
In the holiday-shortened, four-day week to Friday, the Dow Jones Industrial Average slumped 1.83 percent to 13,113.38.
The broad market Standard & Poor's 500 index shed 1.39 percent to 1,453.55 and the tech-heavy Nasdaq lost 1.18 percent to 2,565.70. The key action came Friday after markets were stunned by a drop of 4,000 payroll jobs in the US economy in August, the first decline in four years and far below market expectations.
The government also revised down job growth estimates for June and July by 81,000.
Recession fears
The report stoked fears of a recession, despite assurances from the Fed that the economy was holding to a modest growth rate and that the slump in housing had been contained.
"The Fed can no longer believe that the housing, subprime, commercial paper, hedge fund, etc. turmoil is contained," said David Kotok at Cumberland Advisors.
"There is a rising recession risk." Housing crisis Some analysts say the US can avert a recession if the Fed acts swiftly and aggressively to lower borrowing costs, which could help ease the housing crisis and the credit squeeze.
"The current economic outlook is about as uncertain as it gets," says Lehman Brothers economist Paul Sheard. "There are many paths that the US and global economy could conceivably end up following.
“Our own baseline view is that the global economy, led by the US, will slow but avoid a serious downturn, partly because of aggressive Fed moves to head off such an outcome. “But we are not banging the table on that.
" Warning Gregory Drahuschak, analyst at Janney Montgomery Scott, warns against counting too much on the Fed.
"The Fed is in an interesting box," he says. "On one hand, the employment growth weakness pressures the Fed to do something we suspect it does not want to do now.
The softened but still constant references to inflation will inhibit the Fed's willingness to cut rates, but at the same time, by not doing anything the Fed potentially subjects itself to criticism if the economy slips too much."
A number of analysts say the Fed will try to help ease the credit squeeze with a cut in its base interest rate of 25 basis points at its September 18 meeting, stopping short of a more dramatic 50-basis point move, and then assess the situation. The federal funds rate is current pegged at 5.25 percent.
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