Will the Federal Reserve do More than Give the Markets a Band Aid?

September 7, 2007

You think August non-farm payrolls was bad? Watch out for September.

Over the past 24 hours, the following layoffs have been announced:

1) Countrywide Financial plans to cut 12,000 jobs
2) Lehman Brothers adds another 850 job cuts to the 1200 announced 2 weeks ago
3) Cleveland based bank National City will also be laying off 800 more people after letting 500 go last month
4) Indymac Bancorp is planning to cut 10% percent of their workforce or 1000 people
5) Los Alamos National Labortory warns employees to brace for as much as 2500 layoffs

With three more weeks to go in September, these numbers are expected to climb. The Federal Reserve can no longer pretend that the subprime and credit crisis is not having an impact on the overall economy. It is and in a very serious way.

The only choice that they have at this point is between cutting interest rates by 25 or 50bp.

After today’s non-farm payrolls number, the interest rate curve is pricing in 75bp of easing. There are even rumors about the possibility of an emergency intermeeting cut. The chance of this is low since the FOMC meeting is only 7 trading days away. However the bigger question will be whether the Fed chooses to be proactive or reactive. If they really want to do more than put a band aid on the problems that the US economy currently faces, they will need to surprise the markets with a half point cut, but based upon the measures that we have seen from Bernanke so far, it is more likely that the central bank will play it safe with by cutting interest rates 25bp. The weak non-farm payrolls number has sent stocks, carry trades and the Dow tumbling. The dollar has been completely stripped of its safe haven status as job losses point to weak spending in the months to come as well as the risk for a recession. Retail sales are the most important release on the economic calendar next week. After today’s payrolls number, everyone will be looking for consumer spending to confirm that the economy is continuing on a downward spiral but we actually don’t think that retail sales in August will be that bad. The last time job growth was negative was in August 2003. That month retail sales jumped 1.6 percent but in September and October, spending fell -.8 percent and -.5 percent respectively. Therefore it may be another month before we see a meaningful contraction in spending.

Posted in Bernanke, Countrywide Financial, Fed Rate Cut, Federal Reserve, Forex News, Interest rates, Layoffs, Lehman, Stock Market, US Dollar, US Economy, consumer spending, payrolls, retail sales