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Fed Still The Focus For Markets

Stocks are striking a sour note before the open, with market talk focused full force on the Fed.Traders are also watching a Fed report, due at 10 a.m. New York time on the amount of commercial paper outstanding. Second quarter GDP, released this morning, was revised to 4% from 3.4%.

A letter from Fed Chairman Ben Bernanke to Democratic Sen. Charles Schumer of New Yorkcontributed to the rally in stocks yesterday, the day after the Fed's Aug. 7 minutes contributed to a major sell off. Bernanke makes his first public address since the market turmoil began tomorrow in Jackson Hole, Wyo. and that speech has been the talk of the markets all week.

CNBC senior economic correspondent Steve Liesman is in Jackson Hole at the Kansas City Fed's annual symposium. This year the topic for the meeting and Bernanke's speech will be housing, housing finance and monetary policy.

"He's going to have to give a sense that he's aware of the realities out there...and not be too alarming. The bigger question to me is that he do a mea culpa. 'We said there was no contagion and said it wasn't going to spill over' and it did spill over. It's very significant," said Liesman. "If I were Bernanke I would have been speaking long before this to have taken the pressure off this speech," Liesman said.

In the letter to Schumer, Bernanke said "...the federal open market committee has stated that it is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

But the stock market turned cranky the day before when traders thought the Fed minutes didn't guarantee a rate cut in September. In those minutes the said this: "A further deterioration in financial conditions could not be ruled out and, to the extent such a development could have an adverse effect on growth prospects, might require a policy response."

CNBC's Rick Santelli says he doesn't think Bernanke will shed much more light in his speech tomorrow. "You just saw the best thing that's out there. (in that letter), he said. "He's not going to beat that letter. he's trying to lower the anticipation level."

Home Builders and the Fed
Hovnanian CEO Ara Hovnanian was on "Squawk Box" today, and he believes the Fed needs to cut rates to inject confidence. Hovnanian said during the interview that he is meeting with Bernanke next week, as part of a group of home builders.

"Whoever is the Fed chairman would meet with us once a year to get our sense of what's going on in the market. Our job is to really let him know from an inside perspective what we are seeing in the housing market, and we are going to make it clear that it is in disarray right now. There's a lot of lack of confidence and qualifications and mortgage availability's is an issue at the moment," said Hovnanian.

Commercial Paper
The market for commercial paper, which is basically a short-term corporate IOU, is front and center in the crisis of confidence in the credit markets. The Fed's release will be closely watched. The Fed also releases data on bank activity at the discount window after the bell today.

"The key to tomorrow is the commercial paper announcement," wrote MF Global's Andy Brenner yesterday. "With Cheyne Capital taking most of the press today, we think the key to tomorrow is how much asset backed CP has shrunk in the last week. From what we can tell, money funds and prime brokers have stopped funding a good chunk of the asset backed CP. Banks are being forced to bring it onto their balance sheets...Even with the Fed willing to accept CP at the discount window, we don't get the indication that the banks are willing to be the intermediary to get it to the Fed. If this market continues to contract, the Fed will have to find plan b. This is not a small problem."

Brenner said today the bond market is focused on the front page articles about the Fed. No doubt he's referring to the Wall Street Journal piece looking at the difference between the Bernanke fed and former fed Chairman Alan Greenspan's style.

"The bond market is focusing on the front page stories concerning the Bernanke put… The Fed is going out of their way to plant stories that warn the market not to expect the Fed to bail them out for bad business practices," Brenner writes today.

Interesting Markets View
CNBC's Bob Pisani spoke to Vanguard founder John Bogle on "The Call" yesterday and his comments are worth considering.

"I've never seen actually in my whole investment career, 55 years or so, never seen such short-term volatility, but I don't think it means very much. Shakespeare told us in a different context that the daily moves in the stock market are like the tales told by an idiot--full of sound and fury but signifying nothing," Bogle said.

When asked about what's going on with customers at mutual fund company Vanguard, where Bogle was former ceo, he said: "We see no exciting things going on in terms of cash flows or anything else. It's kind of business as usual now." The wow in Boggles comment, at least to me, was that this investment pro has not changed his portfolio in seven years.

"This is really an important story in the context of what's going on in the market. I haven't made a change in my investment portfolio, which is in Vanguard funds, in seven years, seven years," said Bogle. Now that's patience, or faith. Click here to see what he told Pisani he invested in. "What does an investor do at this stage? I would say do nothing if you have a decent bond position and a diversified stock position," Bogle said.

Speaking of volatility, the Dow yesterday soared 247 points after its 280 point wipe out Tuesday. The 1.9% move took it to 13,289 and gave it the biggest one day move up since Aug. 6. Year-to-date it is still up 6.6% and is 5.1% below its record close of 14,000. Nasdaq was the stand out, climbing 62 points or 2.5%, and S&P 500 moved up 2.2%.

Gasoline on the NYMEX rose 4.2% to $2.1008 on concerns that supplies are at record low levels, and crude oil climbed $1.78 per barrel or 2.5% to $73.51. Natural gas was again under pressure, off 16.3 cents per million BTUs or 2.9% to $5.43.

Around the World
China replaced its finance minister, the head of its secret police and three other cabinet members. The moves took place ahead of am major Communist Party meeting that sets long term policies. Jin Renqing, the finance minister, said he was resigning for personal reasons. Xie Xuren, former head o the State Administration of Taxation replaces him, according to state press.

Chinese President Hu Jintao called for financial reforms said his government must improve supervision of the financial system.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC's Senior Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.