Signs point toward economic stability

WASHINGTON — Financial markets are starting to function more normally, banks are raising billions of dollars in capital, and the latest economic figures, while weak, aren't much weaker than had been expected.

Taken together, these signs of stability make for the calmest economic period the nation has experienced in months. Now economists are grappling with whether the crisis will continue to ease, or whether this is merely the eye of the hurricane, with more big problems coming soon. Thursday, the Census Bureau said sales of new homes in March fell to their lowest level since the early 1990s, and the Commerce Department said orders for durable goods fell for the third straight month.

Next week will offer some bigger answers. On Wednesday, the government will report how much the nation's gross domestic product changed in the first quarter, and on Friday it will report what happened to the job market. A slew of other important economic indicators are also scheduled to be released.

The Federal Reserve will hold a policy-making meeting Tuesday and Wednesday. With signs of stability, the Federal Reserve is expected to cut interest rates only slightly, if at all, a shift from its larger interest rate cuts through the first three months of 2008.

"We're going to find out whether or not we fell into recession, how severe it's going to be, and how the Fed is dealing with it," said Richard Yamarone, chief economist of Argus Research. "This is going to be a huge week."

Financial markets remain fragile, as does the outlook for the overall economy, in the view of Fed leaders. Thus they will remain ready to cut rates further if the crisis in financial markets returns or if the economy appears to be falling into a deep recession, rather than the mild one implied by economic data in recent weeks.

But if conditions remain comparatively stable, as they have this month, then the Fed would be unlikely to cut the federal funds rate to less than 2 percent. It is currently 2.25 percent. Thursday, prices on options markets indicated there is a 1-in-4 chance that the Fed will not cut that rate further next week, a 68 percent chance that it will cut that rate by a quarter percentage point and a small chance of a sharper rate cut.

"You don't want to cut much more," said Dean Croushore, an economist at the University of Richmond who co-wrote a textbook with Fed Chairman Ben Bernanke. "It is time to think about the future. And the little upticks in some of the economic data we've had suggest that the recession will be not too deep."

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