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As Fed Sees Slower Growth, Markets Wonder What's Next

With the Fed signaling slower U.S. growth, developments in Europe and a fresh batch of U.S. economic data will be the focus for markets Thursday.

NY Stock Exchange Traders
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NY Stock Exchange Traders

Weekly jobless claims are expected at 8:30 a.m. ET, and are expected to come in at 385,000, after rising to 386,000 last week.

PMI data, a measure of manufacturing activity, is released at 8:58 a.m. and the Philadelphia Fed survey is issued at 10 a.m., as are existing home sales, leading indicators and FHFA home price data.

Traders are also watching to see if more companies warn on earnings, as Procter & Gamble did Wednesday.

P&G said its sales would be softer due to foreign exchange impacts and slowing global growth.

Caterpillar also disclosed Wednesday that its sales growth was decelerating with a particular, slowing in Europe.

Pierpont Securities economist Stephen Stanley said the markets Thursday will be watching jobless claims, as labor data remains most important.

“The impact of data at the margin is going to be much less going forward,” unless it begins to show major changes in the state of the economy, Stanley said.

He said the markets now know where the Fed stands, for the time being.

The Fed Wednesday finished its two-day meeting with an announcement that it would extend Operation Twist, as expected, and that it would consider further action, if necessary. Twist is a program under which the Fed buys longer dated Treasurys, while selling shorter dated securities, in a bid to keep rates low.

Some in the markets were anticipating a new quantitative easing, or QE3 program. QE is when the Fed’s asset purchases are added to its balance sheet, and are seen as more impactful than Twist

“It was as expected. It was Twist plus,” said John Canally, investment strategist and economist at LPL Financial.

Canally said the Fed’s comment that it could take “further action” was a signal that the Fed is ready to move, if needed.

Fed Chairman Ben Bernanke, speaking at his quarterly press briefing, said that while a decision cannot be taken lightly, the Fed is ready to move on further easing depending on the U.S. economy and developments in Europe.

The Fed also slashed its economic growth forecast for 2012 to 2014, and downgraded its expectations for employment growth. The Fed now expects growth of 1.9 to 2.4 percent in 2012, down from its previous 2.4 to 2.9 percent forecast.

It also trimmed growth for 2013 to 2.2 to 2.8 percent, from 2.7 to 3.1 percent. The Fed's new forecast puts unemployment this year at between 8 and 8.2 percent, up from 7.8 to 8 percent .

It warned that household spending appears to be rising at a slower pace, though it noted that inflation declined.

The Fed also said growth would pick up “very” gradually, as opposed to just gradually in its April statement.

Stocks Wednesday ended the day mixed and fairly flat. The Dow was down 12 at 12,824, and the S&P 500 was down 2 at 1355. The Nasdaq rose less than a point to 2930. The 10-year yield rose to 1.64 percent, as prices fell.

“The markets have been on edge for the last month or two, on the idea the Fed was going to do something.

While they did put the language in the statement that they could do more, the fact is they just locked themselves in for the next six months,” said Stanley.

In Europe, Spain is expected to auction 2-year, 3-year and 5-year notes Thursday. There is also European PMI data.

European finance ministers meet Thursday evening and Friday to discuss the financial crisis, ahead of next week’s European leaders summit.

“I don’t think there’s anything really accomplished” at the summit, said Robert Sinche, head of global currency strategy at RBS. “Greece will have a government. They will ask for leniency and they will get it. Our concern is they need leniency to just stay where they are.”

Sinche said the leader summit could end with some new infrastructure programs.

“I think the two issues they will come out on, if we get anything, is some infrastructure spending and a general plan, or blueprint as to how they might approach a common banking regulatory support system,” he said.

Follow Patti Domm on Twitter: @pattidommQuestions? Comments? Email us at 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 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.