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Clarity Coming to Wall Street

Investors continue to gather clues on whether the U.S. economy is headed toward recession, and next week's data and earnings releases will provide plenty.

Last week, Goldman Sachs weighed in to predict the economy slides into recession this year, roiling stocks and pushing Treasury yields lower. Goldman's chief economist Jan Hatzius estimated declining corporate profits for the year to the tune of 7.5%, a 20% to 25% ultimate drop in home prices, and Federal Reserve rate cuts to 2.5% by late in the year.

As if on cue, Fed Chairman Ben Bernanke chimed in the following day with a concerning outlook for 2008. "Incoming information has suggested that the baseline outlook for real activity in 2008 has worsened and the downside risks to growth have become more pronounced," he said, opening the door for more aggressive easing of monetary policy. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks," he says.

While most in the market believe Bernanke's speech sealed the deal for the Fed to cut the fed funds rate by 50 basis points come Jan. 29, some took his words to mean the Fed would consider emergency, or intermeeting, fed funds rate cuts.

But an emergency rate cut requires an emergency. The Fed's coordinated global auctions via its new tool, the Term Auction Facility, have successfully lowered key interest rates like Libor, which ties directly to subprime mortgage resets. The third auction through the facility, recently raised to $30 billion, is slated for Tuesday. So, traders are left to ponder what the emergency trigger might be.

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