The government released several pivotal economic reports last week, which collectively ratcheted up speculation about when the Federal Reserve would begin raising its targeted overnight interest rate. That rate has been lingering at a 46-year low of 1 percent since June. The time for raising it has not yet arrived.
The Commerce Department reported Tuesday that March retail sales soared by 1.8 percent, more than double the increase projected by economists. Also, February’s sales were revised upward to a solid 1 percent, and January sales were elevated as well. As a result of the better-than-expected retail sales and the recognition that business investment remained strong during the first three months of the year, economists raised their projected GDP growth rate for the first quarter from the consensus estimate of 4.5 percent to 5 percent or higher. On top of the April 2 report showing that 308,000 jobs were generated in March, the data seemed to be suggesting that the expansion, which accelerated during last year’s third quarter, had become sustainable.
February trade data released Wednesday by the Commerce Department revealed that exports increased 4 percent. That was the largest monthly jump in seven years and a strong indication that the trade deficit for the first quarter would be a smaller drag on the growth of gross domestic product than expected.
However, the Labor Department reported the same day that consumer prices had jumped higher than expected in March, setting off a frenzy in the bond market and intensifying speculation about the Fed’s response. The overall consumer price index increased a surprising 0.5 percent in March, matching the January hike.
In any event, considering the Fed’s justifiable concern throughout last year that the ongoing disinflationary process (when the rate of price increases slows) could evolve into a potentially debilitating deflationary episode (when overall prices decline), the increase in the core price index could in fact be viewed as a welcome development.
On Friday, the Fed released its March industrial production report, which showed a surprising decline of 0.2 percent and a lower capacity-utilization rate than February’s. Virtually all of the decline could be explained by a 2.3 percent drop in utility output due to higher March temperatures. Nonetheless, it still reinforced the view expressed by Fed governor Ben Bernanke’s that the large output gap is not rapidly closing. March’s good weather also helped to produce a 6.4 percent surge in housing starts.
Given the still-sizable output gap and the fact that market-driven increases in long-term rates will inject a dose of deceleration momentum into the economy, the Fed should — and probably will — hold short-term rates steady. Before hiking the overnight rate, the sustainable expansion needs to further manifest itself by repeating over the next several months the welcome job growth experienced in March.
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