Trying to guess what the Federal Reserve will do is among economy watchers’ favorite sports, and this week — just before the NCAA men’s basketball tournament starts — is a good time to tune in and see whether we’re looking at business conditions the way the central bank is.
The economy is showing some improvement, and the stock market is bouncing back from early-2016 lows. Not only is there a Federal Open Market Committee meeting this week — it starts today — but this is also a month when Fed chairman Janet Yellen holds a press conference afterward.
The U.S. financial markets, now on a four-week winning streak, will want to know how Yellen thinks the moderately improving economy is affecting the Fed’s stated preference for a series of interest-rate increases this year when she speaks on Wednesday.
Few analysts expect a move on rates at this month’s meeting.
"I would say the odds are around 10 percent, at most," Brad McMillan, chief investment officer for Commonwealth Financial Network, told U.S. News & World Report.
"With recent financial turmoil and inflation still low, the Fed has an incentive to wait and no real incentive to act now. This Fed has also shown a tendency to err on the side of caution. They will sit tight and wait for more data."
Overseas, the European Central Bank cut interest rates last week, signaling it intends to do all it can to spark a recovery in Europe.
In the United States, where there were few fresh economic reports, the markets’ continuing rebound was among the week’s most significant business stories. All three major indexes closed higher and at their highest point for the year, continuing their recovery from their worst-ever start to a year.
The Dow Jones industrial average ended the week at 17,213, down just 1.2 percent for 2016, and the Standard & Poor’s 500 index finished at 2,022.19, down 1.1 percent for the year. The Nasdaq composite index was still down 5.2 percent for the year, at 4,748.47, after a 1.9 percent gain on Friday, but USA Today noted that it is now down less than 10 percent from its 2015 record close.
"While things aren't great, they're not the disaster we thought," Bill Strazzullo, chief market strategist at Bell Curve Trading, told the Associated Press. "We've rallied after a horrendous start to the year."
This week will bring several important economic reports, most of which will arrive during the Fed’s Tuesday-Wednesday meeting schedule. On Tuesday we will get February readings on retail sales and the Producer Price Index. Economists’ consensus forecast is that both fell slightly.
On Wednesday we will get February reports on housing starts and building permits and see the Consumer Price Index for the month.
Economists think housing starts probably rose 4.6 percent in February, to an annualized pace of 1.15 million, but building permits are expected to have fallen 0.2 percent, to an annualized total of 1.2 million.
The report on consumer prices is expected to show a continuing increase in price inflation for consumer goods and services. Excluding the more volatile costs of food and gasoline, so-called "core" inflation is expected to have risen 0.2 percent from January and 2.2 percent from the previous February.
Overall inflation, which includes food and gas prices, is expected to have fallen 0.2 percent, compared with January, and risen 0.9 percent from February last year.
On Friday, the University of Michigan will release its preliminary Consumer Sentiment Index for March. It’s expected to show that consumers’ mood continues to improve, as the index rises to 92.3 from 91.7 last month.
A MarketWatch report says Comerica Bank chief economist Robert Dye is calling the current U.S. economy “The Great OK.” That’s because growth is at 2 percent and the jobless rate is at an eight-year low, but the rebound from the Great Recession is the weakest since World War II.
Some companies have boosted wages to attract workers, but the gains aren’t widespread. About a third of industries have been forced to raise wages by at least 3 percent, according to a Deutsche Bank study.
Most workers are getting raises of 2 percent or less — far less than in a strong economy. And millions of Americans are in part-time jobs or can’t find full-time work. Many people have dropped out of the labor force.
Companies are finding it hard to raise prices. A recent survey of small businesses shows that most of them are absorbing higher labor costs. Lower profits leave them little incentive to boost investment, the key to a stronger economy.
“Even though things are unquestionably better today than they were five years ago, the economy is not great,” Stephen Stanley, chief economist at Amherst Pierpont Securities, told MarketWatch.
No wonder the Fed is in no hurry to push interest rates higher.