20070917_fed_rates_nyse_trader_18.jpgA big rate cut by the Federal Reserve this week, or at a hint more cuts are coming, coupled with this weeks sub prime rescue plan could lift investor confidence and inspire a pre Christmas rally.

While most investors are banking on a cut of at least a quarter percentage points in the bench mark fed funds rate, many think a deeper reduction is needed to unfreeze credit markets and boost confidence.

On Thursday, President George W. Bush announced a plan to stern US home foreclosures, sending stocks surging on optimism it would keep the economy from sliding into a recession.

“The big focus next week is on the Fed meeting” The market was pricing in an interest rate cut, there was still speculation about how big such a cut would be and whether the Fed would also cut the discount rate.

Encouraging data this week, including a resilient payrolls report on Friday, eased some concerns about the economy, decreasing the likelihood of an aggressive 50-point-basis cut in the fed funds rate.

And with just a few more weeks left in the year, the Dow is up 9.3% so far in 2007. The S&P 500 is up 6.9% for the year to date and the Nasdaq is up 12%.


The discount rate for overnight bank loans now stands at 4.5% following the two back to back rate cuts in September and October. While investors are primarily focusing on a potential rate cut on Tuesday, they will also be closely watching inflation data later in the week.

In addition, four blue-chip industrial heavyweights are expected to spell out their financial expectations for 2008 next week.

Manufacturers are facing economic headwinds, including the slumping US housing market, a credit crunch and high energy and commodity costs. Retail sales are expected to have risen in November at the start of the holiday shopping season.

Other economic data scheduled for this week includes pending home sales for October on Monday, which if very weak, would add to calls for a big rate cut on Tuesday. They are expected to fall 1%.