Credit Markets Brace for a Brisk Autumn

September May Reveal Depth of Crisis

The weeks after Labor Day for the credit markets are like the month after Thanksgiving for retailers: It's the shopping season for debt.

This September may be especially hectic, however, because of Wall Street's credit crunch, which began after skyrocketing mortgage defaults caused financial institutions to grow wary of all kinds of loans.

Major sectors of the credit markets stalled, and companies have been struggling to borrow money. Wall Street banks, which committed to lending hundreds of billions of dollars, have been unable to sell off that debt to bond traders and investment funds.

Economists say it is hard to tell whether this is just a passing storm or the beginning of a crisis. Part of the problem is that the credit markets are tremendously complex -- it is difficult even for Wall Street insiders to know basic facts, such as price, for many debt securities. And unlike stocks, which have the Dow Jones industrial average, there is no single, easily digestible way to gauge how sections of the credit markets are doing.

So far, the credit crunch has raised many questions: How will the Federal Reserve respond? Will homeowners cut back on spending? Are investment banks doing worse than they have revealed? Is another hedge fund blowup on the horizon?

The answers may be coming this month. Here is what to look for:

Bernanke's Big Day

It is no exaggeration to call the Sept. 18 meeting of the Federal Open Market Committee, which sets the financial system's benchmark borrowing rate, the most critical meeting of Federal Reserve Chairman Ben S. Bernanke's tenure. Entire segments of the debt markets are likely to be on hold until that meeting, when the Fed decides whether to cut interest rates.

"A lot hinges on what Bernanke does on the 18th," said Edward Rombach, senior analyst at Thomson Financial. "The Fed is like a snail crawling along a razor's edge. One false move and it gets bisected."

Bernanke made it clear in a speech last week that the Fed is closely watching whether the credit turmoil is spilling into the economy. The markets, as a result, may behave in funny ways in the next few weeks.

A bad economic report may cause traders to buy stocks, since it would increase the likelihood of a Fed interest rate cut. Better-than-expected reports on the economy may spark stock sell-offs and increase worries that the Fed will leave the federal funds rate constant at 5.25 percent.

That was what happened yesterday after an economic survey showed a worse-than-expected slowdown in manufacturing and construction spending in August. Bad report? Not for the markets. The Dow Jones industrial average closed up 91 points after the report was released.

A similar pattern is expected on other key economic reports slated to be released this month.