Hubbard was chairman of President George W. Bush's Council of Economic Advisers from 2001 to 2003. He was mentioned as a candidate to replace Alan Greenspan as Fed chairman, the job ultimately given to Ben Bernanke.

The policy-setting Federal Open Market Committee used 17 consecutive one-quarter percentage point rate hikes between June 2004 and June 2006 to raise benchmark interest rates to the current 5.25 percent from a low of 1 percent.

The U.S. central bank, under Bernanke's leadership since February, "still has enormous credibility with the public," which is helping to keep inflation expectations contained, Hubbard said.

But at this point, with economic growth being cut by a turndown in the housing market and the spillover effects of high energy prices, the Fed's job has become harder, he said.

"It is easier to tighten into strength than it is to tighten into weakness when you had a policy that was that accommodative," Hubbard said.

"It is a very difficult moment for the Fed to achieve both the desired fall in inflation and the soft landing in the real economy at the same time. It's easy to do one or the other; it's a little more difficult to do both."

Hubbard said the U.S. economy faced head winds from housing and energy, but seemed poised for a "soft landing" after years of solid growth.

"I still expect the economy to be able to grow in the 2.5 to possibly the 3 percent range by the time we get into next year," he said.

One risk to that outlook would be weakness in the capital goods sector at a time business spending has been seen as likely to pick up the slack as consumer spending softens, Hubbard said.

Something more certain is there likely will be limited relief from high energy prices, he said, because of strong growth in large emerging economies, decent growth in the United States and other industrial economies, and supply restrictions in many parts of the world.

"It's hard to see a lot of weakness in energy prices over the next year."

"Volume has been really light, so whatever activity you see going on in the market, you have to take with a grain of salt. It's kind of like the kids are redecorating the living room and then, when the parents come back, they put it back the way it was."

Looming over the market is a mounting debate among strategists and economists over whether the United States is heading for a gradual economic slowdown, or a full-fledged recession, especially after weaker home sales this week.

"The slowdown in the housing market is bigger than people thought and the market is worried about the knock-off effect of the slowdown in consumer spending," said Kurt Karl, chief U.S. economist at Swiss Re New Markets in New York.

Investors will get a sense of how worried the consumer really is on Tuesday with the release of consumer confidence data, forecast to show a decline this month from July. The University of Michigan will release the final reading of its August consumer sentiment survey on Friday.

A snapshot of both ends of the retail spectrum will come on Thursday, with deep-discount chain Dollar General Corp. and luxury jewelry retailer Tiffany & Co. both set to report earnings.

WAGES AND WEATHER

The week's most widely watched indicator will be the August nonfarm payrolls report, due on Friday. Economists polled by Reuters forecast that 120,000 jobs were added in August, up from 113,000 in July.

With the Federal Reserve remaining vigilant about inflation, the market will be on the alert for any unexpected increase in average hourly earnings. The forecast calls for wages to go up 0.3 percent in August, after July's gain of 0.4 percent, the Reuters poll showed. The August unemployment rate is pegged at 4.7 percent, down from July's 4.8 percent.

Investors may get a sense of where the Fed stands on inflation and growth on Tuesday when minutes from the last
Federal Open Market Committee rate-setting meeting are released.

In addition to wages and inflation, the weather will be on Wall Street's watch list.

Bad weather brewing in the eastern Caribbean Sea could be dubbed Tropical Storm Ernesto later on Friday and could grow into a full-fledged hurricane by next week, forecasters said.

"The ghost of Katrina is arriving right on schedule in the form of the next Caribbean storm. That's going to be on people's minds," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co. in Lake Oswego, Oregon. "It will play into oil concerns and whether there will be any interruption to transportation and industry in the Gulf Coast states."

Hurricane warnings could put the shares of insurers, oil producers and refiners in the spotlight next week.

"The good news is that it looks like insurance carriers will be less vulnerable this year" since they were able to raise rates and reduce their exposure to insured properties, Dickson said.

On Friday, both the Dow and the S&P 500 ended the session lower after the storm threatening the Gulf of Mexico sent crude oil prices higher. Traders were reluctant to have positions open over the weekend. The Nasdaq rose slightly.

The blue-chip Dow Jones industrial average ended on Friday at 11,284.05, down 20.41 points, or 0.18 percent. The Standard & Poor's 500 Index finished at 1,295.09, down 0.97 of a point, or 0.07 percent. The Nasdaq Composite Index closed at 2,140.29, up 3.18 points, or 0.15 percent.

For the week, all three major U.S. stock indexes fell. The Dow declined 0.9 percent, while the S&P 500 shed 0.6 percent for the week and the Nasdaq dropped 1.1 percent.

U.S. crude oil for October delivery rose 15 cents to settle on Friday at $72.51 a barrel on the New York Mercantile Exchange. For the week, the price of NYMEX October crude was up 0.6 percent.

Iran's dispute with major world powers over its nuclear ambitions will stay on Wall Street's radar screen in the coming week. The deadline is Thursday for a United Nations nuclear watchdog report that will certify whether Iran has stopped uranium enrichment-related activity or not.

"No one's been around as you've seen, the volume has been pretty light, and we're subject to more volatility that will continue into next week as well," said Tim Woolston, portfolio manager at Boston Advisors Inc.

Among the major economic indicators on tap are "preliminary" data, actually a second look, at second-quarter gross domestic product, on Wednesday, followed by August indexes from purchasing managers in the Chicago and New York areas, plus July factory orders -- all due on Thursday.

Those traders and strategists who aren't on the beach will be watching for key inflation data before Thursday's opening bell with the release of July personal income and consumption data. That report will include one of the Fed's favorite inflation measures, the core personal consumption expenditures index, or the core PCE index. It excludes volatile food and energy prices.

The Institute for Supply Management is scheduled to report its August reading on U.S. manufacturing activity on Friday. The ISM index is expected to edge higher. Domestic car and truck sales for August, which are expected to come in at a slower pace than July's sales, also will be out on Friday.

EARNINGS: TECH AND TAX PREP

A handful of earnings reports from technology companies are due next week, including telecommunications equipment makers ADC Telecommunications Inc. and Ciena Corp., as well as business software maker Novell Inc. and optical network equipment maker JDS Uniphase Corp.

H&R Block Inc. is expected to report earnings on Thursday. But the tax preparer already said this week it expects to take a charge for losses related to rising delinquencies by subprime mortgage customers, prompting a downgrade of the stock by UBS on Friday.

So far this year, $74.7 billion has been announced in U.S. management buyouts compared with $9.2 billion last year, accounting for more than 9 percent of U.S. merger and acquisition deals, up from 1.2 percent in the year earlier period. That growth also outpaces the growth in U.S. private equity and M&A overall, up 151 percent and 25 percent respectively this year.

Among this year's biggest deals are plans for the $21 billion purchase of health care company HCA by its founders as well as private equity funds Bain Capital, Kohlberg Kravis Roberts & Co and Merrill Lynch Global Private Equity.

In addition, the founder of pipeline operator Kinder Morgan, Richard Kinder as well as co-founder Bill Morgan and board members Fayez Sarofim and Mike Morgan, joined with GS Capital Partners, AIG Global Asset Management Holdings, and the Carlyle Group and Riverstone Holdings.

And food service company Aramark Corp. said it to would go private in a $6.3 billion management buyout led by its Chairman and Chief Executive Officer Joseph Neubauer as well as GS Capital Partners, CCMP Capital Advisors and J.P. Morgan Partners, Thomas H. Lee Partners and Warburg Pincus LLC.

Pierce said managers typically have a number of incentives to take part in buyouts, including a possible change of control payment.

"Management teams get roughly 10 percent of the ongoing entity so they have the ability to participate in the upside" after the company is private, Pierce said.

That can be easier to do if the company's stock has been underperforming the broader market.

But some critics say these management buyouts can tie the hands of shareholders and board as they face a "my way or the highway" situation; the CEO or the founder might leave if the deal does not go through and there is no guarantee the company will find another buyer.

"It's kind of a difficult position for shareholders to be in," said Chris Young, head of mergers and acquisitions research at ISS. "They are dealing with a counter party that has more negotiating leverage than the typical acquirer."

But, he said, courts look closely at the deals and the companies themselves work hard to treat their shareholders fairly by creating a special committee of the board that hires investment bankers and lawyers to examine the deal.

In addition, the boards typically use a "go-shop" period of one to several months during which they look for potential other buyers.

In HCA's case they have 50 days to shop the company around. Aramark spent more than three months reviewing its management's buyout offer. Kinder Morgan's special committee, which named Morgan Stanley and Blackstone as its advisors in June, has not provided any information about its review process.

WHITHER THE LBO

It would take several changes to reduce the flow of money to management buyouts. The debt markets, which have weathered rising rates, would have to tighten up first, which would make borrowing more difficult and costly.

In addition, if the stock market took off over an extended period of time or if some of the current large deals ended up as disasters, that could slow down deals.

"If, in fact, returns begin to tank because of problems with the acquisitions and so forth, the available additional money could be more limited, that could have an impact at some stage," said Wally Scott, professor of management at the Kellogg School of Management at Northwestern University.

But so far, indications are few that private equity deals - and by extension management buyouts - are headed for a decline.

While deal makers have been watching the credit markets closely to see if there are signs of a retreat that would hurt the ability to finance large deals, that has not happened yet.

"I'm still hearing that it's a really robust fund-raising market," said David Breach, an M&A lawyer who focuses on private equity, based in the San Francisco office of Kirkland & Ellis LLP.

"I think as long as the finance markets hold up, we are likely to see other large transactions. The number of funds that are capable of doing these large deals has, if anything, expanded," Breach said.

Ashworth reckons 30 per cent of all the jobs created since the end of the last recession in 2001 - 1.4 million - have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, Capital calculates that 73,000 jobs a month will be lost.

The Federal Reserve left interest rates unchanged for the first time in 18 meetings earlier this month, as chairman Ben Bernanke weighed the risks of high inflation and the threat to growth from the long-expected housing market crunch.

Stephen Roach, chief economist at Morgan Stanley, predicts that the property slowdown will shave at least 2 percentage points off GDP growth next year, taking the US perilously close to recession, as construction spending plummets and homeowners lose the cushion of extra wealth that comes from rapid price rises.

'For a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal,' he said, warning that, with US fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom. 'A bursting of the property bubble poses equally serious risks for America's key trading partners and for the rest of an increasingly integrated global economy,' he added.

Anxieties about the fragile US housing sector come as analysts in the UK debate whether this month's rise in interest rates will dent prices here. Property website Hometrack will warn tomorrow that the so-called 'mini-boom' that has buoyed the market in London over the past few months will be snuffed out by higher mortgage costs.

Fionnuala Earley, group economist at Nationwide, said she believed the market could ride out the rate hike, but expects it to slow going into the new year. 'There are supportive factors: buy-to-let figures are strong, and immigration suggests there's going to be tenant demand, and there are property supply constraints,' she said. 'But if the MPC's raising rates, it's a warning shot, and people are going to think again about whether they should move and whether they should stretch themselves.'