The Fed action of last week was termed as revolutionary by some. Although Fed Chairman Ben Bernanke acknowledged that inflationary expectations were stable and deflationary risks prevail, insufficient economic growth has promoted the central bank to announce QE III measure. This bold move has prompted BMO Capital Markets to expect more from the Fed until the unemployment rate begins to move in a downward trajectory and drops off to no higher than the mid-to-low 7 percent range.

The FOMC announced QE III by way of its decision to buy additional Mortgage Backed Securities at a rate of $40 billion each month. As expected, the Fed extended the timeframe for its extremely accommodative policy stance pledge to mid-2015. Meanwhile, the Operation Twist program as well as the Fed's policy of re-investing principal payments from the Fed's holdings are set to continue.

ING stated that the way QE III was crafted makes it less likely that adverse demand shocks will permanently reverse the recent fall in real interest rates and the rise in expected inflation.

The Fed has in fact committed to a very big schedule of long-term securities purchases through the end of 2012, which is just three months away. However, because the policy is open ended, the central bank can opt to continue the purchases or pare back depending on the evolving economic scenario. The logic behind the QE is kick starting the labor market by boosting the economy. FTN Capital Markets notes that the transmission mechanism is loan growth. Sadly, there has been very little loan growth. The job market condition now assumes importance and will be closely watch to see in which the Fed moves.

A Federal Reserve report released last week revealed that industrial production fell 1.2 percent month-over-month in August following a downwardly revised 0.5 percent increase in July. According to the Fed, hurricane Isaac accounted for one-fourth of the drop. Manufacturing fell 0.7 percent, dragged by weakness in consumer goods and business equipment output. Mining and utility output also declined. Capacity utilization declined 1 percentage point to 78.2 percent.

The Commerce Department's retail sales report showed a 0.9 percent solid increase in retail sales for August. Auto sales were up 1.3 percent, the highest increase since November 2007. Gasoline station sales climbed by 5.5 percent. That said, excluding autos, gas and building materials, core retail sales that go into GDP calculation rose a disappointing 0.1 percent.

According to the Labor Department, producer prices rose by 1.7 percent month-over-month in July. Economists expected a more modest increase. The producer price inflation was boosted by a 6.4 percent jump in energy prices and a 0.9 percent increase in food prices. The annual producer price inflation rate was 2 percent. The core reading was at 0.2 percent, in line with estimates, rendering the annual rate of the core inflation measure at 2.5 percent.

Wholesale inventories at the end of July were up 0.7 percent. Inventories rose 5.3 percent from the year-ago period. At the same time, wholesale sales edged down 0.1 percent month-over-month, but rose 2.7 percent year-over-year. The wholesale inventories to sales ratio came in at 1.21 compared to 1.18 in July of last year.

Outstanding consumer credit fell by $3.3 billion in July following an upwardly revised $9.8 billion increase in June. Economists expected an increase of $9.8 billion. Revolving credit tied to credit cards fell by $4.8 billion compared to a $1.6 billion increase in non-revolving credit.

The U.S. trade deficit widened to $42 billion in July, although the deficit was narrower than economists had expected. Exports fell 1 percent month-over-month, while imports were down 0.8 percent, marking the fourth straight month of declines. In real terms, the trade deficit widened to $46.5 billion from $44 billion in June.

After the Fed support, the markets now turn their attention to fundamental data to assess the economic momentum. The focus of the unfolding week is on a trio of housing market data, a couple of regional manufacturing reports and a slew of Fed speeches, including the one from Bernanke.

Traders may stay focused on the National Association of Home Builders' housing market index for September, the National Association of Realtors' existing home sales report, the Commerce Department's housing starts report for August and the results of the regional manufacturing surveys by the New York Federal Reserve and the Philadelphia Federal Reserve.

It would be interesting to hear from the several Fed speakers scheduled to deliver public addresses this week to understand the Fed's thinking on the economy and the need to support recovery. The Conference Board's leading economic indicators index and announcements concerning Treasury auctions of 2-year, 5-year and 7-year notes round up the economic events of the week.

Builder sentiment is expected to improve further in September, aided by better affordability. Inventory situation is also improving, as reflected by the months supply of both existing and new homes currently below its historic median.

The regional manufacturing surveys are expected to show modest improvement in September, although conditions are most likely to have remained weak.

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