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Another tough call on rates for the Fed

It’s as if the business world is clearing its agenda for the Federal Reserve.

It’s as if the business world is clearing its agenda for the Federal Reserve.

Not much economic news — of the planned variety, in the form of government and private reports — is scheduled this week as the central bank’s Federal Open Market Committee prepares to meet today and Wednesday in Washington, D.C.

The most significant data that economy watchers will see this week are August figures on housing starts and building permits — today — and August reports on home resales and leading economic indicators Thursday.

So what is the Fed likely to do?

The financial markets ended last week hedging their bets. On Friday the Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite index fell in a range of 0.1 percent to 0.5 percent, although all three indexes were higher for the week: The Dow added 0.2 percent, the S&P was up 0.5 percent and the Nasdaq rose 2.3 percent.

USA Today noted stocks’ volatility, but said the consensus among economists and futures markets was that the Fed will delay at least until December the interest-rate increase it has been pondering all year. The economy has shown growth, but hiring cooled in the August jobs report.

As the saying goes, you can’t tell the players without a scorecard, and USA Today listed the Federal Open Market Committee members in its story according to whether they are doves, hawks or centrists on rates.

In the “doves” camp are chairman Janet Yellen, New York Fed president William Dudley, Boston Fed president Eric Rosengren and Fed governors Daniel Tarullo and Lael Brainard.

The “hawks” are St. Louis Fed president James Bullard, Cleveland Fed president Loretta Mester and Kansas City Fed president Esther George.

The “centrists” are Fed vice chairman Stanley Fischer and Fed governor Jerome Powell.

The doves still outnumber the hawks, and the see-saw economy does not appear to be changing many minds.

Fortune argues that a 2.3 percent increase in the core Consumer Price Index (it strips out volatile food and energy costs) during the past 12 months that the Labor Department revealed Friday could tilt the Fed toward a rate increase this week, although the editors agree that another delay is the more likely outcome.

The argument for a hike now is that prices are rising faster than the 2 percent goal the Fed set. Of course, as Fortune pointed out, the Fed relies on the Personal Consumption Expenditure Index rather than core CPI, and the two measures have diverged.

The Wall Street Journal said the PCE index rose just 0.8 percent in July from a year earlier and that prices, excluding food and energy, were up 1.6 percent on the year for the fifth consecutive month. That’s below the Fed’s 2 percent target.

The Journal also offered another reason the Fed might not act now. The University of Michigan, which produces the monthly Consumer Sentiment Index, said in its mid-September report that Americans now expect inflation to be just 2.3 percent during the next year, the weakest reading in six years. Expectations for inflation five to 10 years from now stayed at 2.5 percent, a record low.

“[Consumer] confidence was unchanged in early September from the August final and barely different from the July reading,” Richard Curtin, chief economist of the university’s Surveys of Consumers, said in a statement that accompanied the mid-month report.

“Small and offsetting changes have taken place in the third-quarter 2016 surveys: Modest gains in the outlook for the national economy have been offset by small declines in income prospects, as well as buying plans,” Curtin added. “While income gains expected during the year ahead have edged upward, declines in inflation expectations were the main reasons future financial prospects improved, as both near- and long-term inflation expectations fell to near record lows.”

One of last week’s most important economic reports showed that retail sales fell 0.3 percent in August. Excluding car and truck sales, the decline was 0.1 percent. It was the first time since March that sales declined.

"With households not buying, manufacturers stopped producing. If the Fed is data-dependent, then the next time a hike would likely come is December," Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pa., told Reuters.

“This is not a good report, for the most part,” Chris Christopher, director of consumer economics at IHS Global Insight in Lexington, Mass., told Bloomberg. “The consumer’s doing relatively well — even with these numbers, it’s one of the strongest parts of the economy. There’s modest inflation, real disposable income gains are relatively robust and they feel pretty confident.”

The retail sales report was one of the last puzzle pieces the Fed received before the meeting that starts today. Last impressions can be lasting, and this one probably will encourage the central bank to keep its finger on the pause button.



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