Fed meeting could reveal path of rate hikes
A meeting of Federal Reserve policymakers highlights a busy week of economic news that could make some sense of the economy’s conflicting signals and reveal whether it’s emerging in earnest from a slump the past two quarters. It’s virtually certain the Fed won’t raise interest rates, but it could provide clues on the likelihood of a July move and the path of future hikes.
On Tuesday, the Commerce Department releases a report on May retail sales that should mark the week’s most significant reading of the economy in the second quarter. Consumption makes up 70% of activity, and sales growth hit a 13-month high in April after a sluggish first quarter, driven partly by rising gasoline prices. But even “core” sales — which exclude items such as gas and autos — soared. Yet while Americans are benefiting from reduced debt and still-low gas prices, job growth slowed substantially in April and May. That suggests sales gains were more measured last month, says Nomura economist Lewis Alexander. Economists surveyed by Action Economics estimate total sales jumped 0.5% on higher pump prices. But PNC Financial Services Group and Nomura figure core sales edged up a modest 0.1% to 0.2%.
Fed Chair Janet Yellen removed most of the drama from Wednesday’s Fed meeting when she said in a speech last week the recent disappointing job gains were “concerning” and raised questions about whether it’s a blip or more enduring downturn. That solidified the belief that a June rate hike was likely off the table. But Yellen provided a generally upbeat view of the labor market and said she doesn’t put too much weight on one report. Some economists concluded that left open the possibility of a July increase. A post-meeting statement and Yellen’s news conference may shed light on whether July is possible or September is more realistic. The Fed raised its key rate in December for the first time in nine years but put further increases on hold since.
The Fed would like to see inflation accelerate before lifting the rate again. Rising energy prices pushed inflation to a three-year high in April. But core prices, which exclude volatile food and energy items and which the Fed monitors more closely, picked up slowly after accelerating early this year. Economists expect the Labor Department to report Thursday that gasoline nudged up headline inflation 0.3% in May while the core reading rose a modest 0.2%.
The housing market has been a bright spot. Housing starts jumped a healthy 6.6% in April. But after warm winter weather pulled forward some starts to early in the year, Alexander expects some payback in May. Economists expect Commerce to announce Friday that starts fell 1% to a seasonally adjusted annual rate of 1.2 million.