There's little doubt the Federal Reserve will raise interest rates this week for the first time this year. But economists will scour the Fed's post-meeting statement for clues on whether policymakers foresee a faster pace of hikes in coming years in light of some signs pointing to higher inflation ahead. The week also features the latest reports on inflation, retail sales and industrial production.
Retail sales broke out of a mini-slump with a vengeance in October, with both overall and core readings climbing 0.8%. Consumers are on solid footing as a result of steady job and income growth, cheap gasoline and reduced debt. But sales likely moderated in November after the prior booming gains, says Nomura economist Lewis Alexander. Economists estimate the Commerce Department will report Wednesday that overall sales rose 0.3% last month while the core measure — which excludes volatile categories such as autos, gasoline and building materials – increased a still-healthy 0.5%.
Industrial production has stabilized this year after serving as a drag on the economy in 2015. Economists expect the Fed to announce that industrial production fell 0.2% in November after a flat reading the previous month. Oil prices have partly rebounded, prompting crude producers to resuscitate some shuttered wells and place orders for steel pipes. And the strong dollar, which had been hurting exports, was easing until a recent rally. But while manufacturers are treading water, other industrial sectors have been mixed. Mining production is up, but warm weather has tempered utility output, says PNC Financial Services Group.
The Fed will have the benefit of reviewing the retail sales and industrial production figures before completing a two-day meeting Wednesday afternoon. But they're unlikely to move the needle. Last week's solid jobs report for November further cemented its expected decision to raise its key interest rate by a quarter percentage point – which would be just the second hike since 2006. It has been signaling the move for months now that payroll growth has stabilized and the economy rebounded in the third quarter. President-elect Donald Trump's fiscal stimulus plan and a recent OPEC decision to cut oil production to support prices could mean higher inflation and faster rate hikes in coming years. But economists say the Fed is unlikely to account for those developments in its forecast, and will continue to predict gradual rate increases.
On Thursday, the Labor Department releases its consumer price index for November. Rising gasoline prices have pushed up overall annual inflation from 1.1% in August to 1.6% in October. Core inflation, which excludes volatile food and energy costs, dipped to 2.1% in October as airline fares tumbled. Higher pump prices should spur an uptick in overall inflation to 1.7% as core inflation rebounds to 2.2%, economists estimate.
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