NEW YORK (Reuters) - Here's one guiding principle for investors as they anticipate Friday's U.S. jobs report and sort out what it means for the Fed's next move on interest rates: "Watch what we do, not what we say."
The Federal Reserve rarely raises interest rates when unemployment is on the rise, and analysts expect the upcoming payrolls data to show U.S. employers cut jobs for the eighth consecutive month in August.
So, no matter what the smattering of Fed officials scheduled to speak this week say about the current elevated rate of inflation, don't expect them to act on this any time soon, analysts say.
Also, economists advise, don't think last week's surprisingly strong growth numbers change the equation. The world's largest economy is still in the grips of the worst housing slump since the Great Depression of the 1930s.
"Even if payrolls are good they will probably still be negative. Historically the Fed doesn't raise rates when payrolls are negative," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.
"Fed behavior tends to be really correlated with unemployment. They have a dual growth and inflation mandate but they tend to focus more on the growth side of things when the economy is weak."
The monthly U.S. payrolls report is one of the highlights of the global economic calendar and economists expect it to show 75,000 jobs were lost in August, according the median of forecasts in a Reuters poll.
Economists expect the unemployment rate to remain at July's four-year high of 5.7 percent.
The report comes at the end of a week that also includes interest rate decisions from the European Central Bank and the Bank of England. Like the Fed, they are also in a bind over slowing growth amid rising price pressures.
Both are widely expected to keep rates on hold when they deliver their decisions on Thursday. This week will be shortened in the United States due to Monday's Labor Day holiday.
Key manufacturing and service sector surveys from both sides of the Atlantic will flesh out the global economic picture, which has been one of weakness in recent months.
ENOUGH EXCITEMENT
The Republican convention this week to nominate John McCain, following last week's gathering of Democrats to pick Barack Obama, may fill out expectations for tax policy under whichever administration takes over next year.
If that weren't enough excitement, energy markets are bracing for the possibility that Tropical Storm Gustav, upgraded to hurricane strength on Friday, may blaze a destructive trail deep into a concentration of oil and natural gas platforms off Louisiana and Texas.
The area, which provides the United States with a quarter of its crude oil and 15 percent of its natural gas, was battered in 2005 by two major hurricanes, Katrina and Rita, which sent oil prices soaring.
This year's surge in oil prices to record highs has already punished consumer sentiment, and economists have debated whether its effect has been bigger as a restraint on growth or spur to inflation.
"The energy price surge is crippling the economy," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.
"Now we have a hurricane coming ... we're about to find out whether or not we're going to do a little experiment here: What happens to the economy when you really show what energy prices can do?"
HOW STRONG, HOW LONG?
To make matters worse, Alabama's Jefferson County has been negotiating with its lenders in an effort to avoid seeking bankruptcy protection, which would be the biggest municipal bankruptcy since that of Orange County, California, in December 1994. This is just the latest reminder that the housing-inspired credit crisis is still spreading its reach and will continue to worry the Fed.
It should also temper optimism fueled by data last Thursday showing the U.S. economy grew at a solid 3.3 percent annual rate in the second quarter, much stronger than first thought. Many analysts say they expect growth to flag in the months ahead.
Economists also caution against jumping to the conclusion that the growth figures could change the view of many that the Fed will be on hold for a considerable period of time after slashing interest rates by 3.25 percentage points in the months after the credit turmoil erupted last year.
The Fed's Beige Book summary of economic conditions, due on Wednesday, will inform its September meeting and may be a better guide than the more historical GDP data.
Also, another negative U.S. jobs report would be a timely reminder of the shaky state of the world's largest economy.
"Clearly the job market is telling us that the economy is not growing above potential," said Brian Fabbri, managing director of economic research at BNP Paribas in New York.
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