What's happening in the economy? Fed could signal earlier interest rate hike as economy surges; retail sales, housing starts may rebound

Keira Wingate, USA TODAY
·2 min read

Amid a booming economy and rising inflation, the Federal Reserve this week could signal that it's likely to move up the timetable for withdrawing the extraordinary stimulus measures it has enacted during the COVID-19 pandemic.

The Fed meeting highlights a busy week of economic news that also features the latest data on retail sales and housing starts.

Autos may crimp retail sales

Retail sales have been choppy lately, flatlining in April after a strong March fueled by government stimulus checks and a rebound from February's storms. The May report, out Tuesday, is expected to show overall sales fell 0.4%, dragged down by a drop in vehicle inventories because of lingering computer chip shortages, according to a survey of economists by Action Economics and PNC Financial Services Group. But excluding vehicles, retail sales likely rose a solid 0.5%, according to the Action Economics survey.

Consumer spending makes up almost 70% of the nation's gross domestic product. Americans are spending on things like clothing, sporting goods and dining out after the pandemic sharply curtailed their outlays.

Housing starts may rebound

Housing starts tumbled 9.5% in April to 1.57 million, driven by a slide in single-family home construction. Due to shortages of building materials and labor, residential construction has been delayed.

A bounce-back is likely in May. Economists surveyed by Action Economics forecast that construction began on 1.65 million homes last month.

Fed may hint at earlier rate hike

The economy has continued to show rapid progress amid rising vaccinations and falling COVID-19 cases, and consumer prices have jumped as demand has surged while supply-chain snarls have caused product shortages. Although the Fed believes the stronger inflation is temporary, the developments could lead policymakers to push up their median forecast for the first hike from the Fed's near-zero benchmark rate to 2023 from 2024 at the earliest.

The Fed also could signal that it may begin tapering its $120 billion a month in Treasury and mortgage bond purchases – which help hold down long-term interest rates, such as for mortgages – earlier than anticipated, says economist Kathy Bostjancic of Oxford Economics. She expects the Fed to begin tapering the purchases early next year, with the Fed announcing the move at its August conference in Jackson Hole, Wyoming.

But Fed Chair Jerome Powell needs to talk a fine line. With job gains disappointing the past two months because of worker shortages, the Fed likely hasn't achieved "substantial progress" toward its goals of maximum employment and stable inflation, Bostjancic says. Powell may simply say Fed officials discussed reducing the bond purchases without hinting at a timetable.

This article originally appeared on USA TODAY: Interest rates: Fed may signal earlier hike; retail sales reporting

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