The Federal Reserve has spent the past decade coaxing a recession-torn U.S. economy back to health. They’ve had resounding success in slashing unemployment, yet wage growth and inflation have remained stubbornly slow – keeping victory at bay.
The week ahead could finally clinch it.
Data released over the next nine days could show both accelerating prices and pay, like pieces of a data puzzle clicking into place. Other major economic headlines will bring key news for the central bank, from a Treasury refunding to bellwether earnings reports. Here’s what to watch as the Fed closes in on a milestone that will make it a rarity in the post-crisis world: a monetary authority that has hit all of its targets on the nose.
GDP, Employment Cost Index (April 27)
Gross domestic product data for the first quarter will be the main event on Friday, but a side act – the Employment Cost Index – could easily steal the show. The figures will be released alongside GDP at 8:30 a.m. Financial markets are sensitive to any signs of stronger inflationary pressures, and they interpreted a jump in average hourly earnings back in February as a sign that the central bank might pick up the pace. If this quarterly series on labor costs comes in stronger than expected, it could have a similar effect. Any pickup would be welcome news at the Fed, though: Officials have been puzzled that slow pay gains have persisted despite low unemployment. Gauge of U.S. Worker Costs May Steal GDP's Spotlight This FridayFor what it’s worth, GDP is likely to show a slowdown to 2 percent for the first quarter from 2.9 percent at the end of 2017. That fits a pattern of early-in-the-year slowdowns, and economists expect a second-quarter rebound.
Personal Consumption Expenditures (April 30)
If a single data point could crown the Fed victorious, it’s this one: PCE is the Fed’s preferred inflation gauge, and the March report is expected to come in at just about 2 percent on a core basis – right on target. If that happens, the Fed will have basically achieved its dual mandate from Congress, which calls for maximum employment (Fed officials think they’ve checked that box) and stable inflation (the Fed itself has specified 2 percent). Granted, central bankers put more weight on trends than one month of data, but a bull’s eye on their inflation goal will be met with at least a little relief inside the Fed’s Eccles Building in Washington.
A 2-handle on inflation might also feature in the debate on May 1-2, when the policy-setting Federal Open Market Committee meets in Washington. Officials won’t release new economic projections and aren’t expected to hike rates, but if price gains come in strong, the Fed could potentially upgrade its assessment of inflation in the post-meeting statement. Traders expect a quarter-point increase in June, which would be the second this year.
Treasury Refunding (May 2)
On Wednesday, all eyes will be on fiscal policy with the Treasury’s refunding announcement, which will map out how the government plans to fund a rising budget deficit. February’s refunding marked the start of a ramp-up in note and bond sales as Treasury seeks to fund the government’s growing deficit and the Fed allows debt to roll off its balance sheet. Bond dealers predict Treasury will add to last quarter’s acceleration with another across-the-board lift in note and bond auction sizes. Many expect the department will also increase inflation-linked debt sales this time around. Why does it matter for the economy? Because more bonds theoretically means more upward pressure on market interest rates.
Jobs Report (May 4)
Wage pressures will take center stage again when the Labor Department releases its April jobs report. The monthly figures will show how many positions employers added on net, and they'll give an up-to-date glimpse at how pay is shaping up. Both markets and the Fed will be watching out for an increase in average hourly earnings, which came in at 2.7 percent in March.
The labor force participation rate is another index to watch, because it’s stabilized overall and increased for prime-age workers. Goldman Sachs economists think that trend may be nearing its apex, but others – including Carl Riccadonna, Bloomberg Economics chief U.S. economist – say it could have room to run. “The true test of participation is wage pressures,'' he said. And, as previously noted, those have yet to take off.
High-level economic data won’t come in a vacuum: It’s earnings season, and U.S. companies are offering snapshots of how consumers and businesses are faring. On one hand, they’re benefiting from a strong economy. On the other, they face huge uncertainties. Quarterly reports from Starbucks on April 26 and McDonald's on April 30 may give signs as to whether wage pressure is intensifying in a tight labor market and consumer spending is rising. Data from Kraft Heinz (May 2) and Kellogg (May 3), which are struggling with an industry-wide slump that has made it tough to raise prices, may indicate whether inflation will continue to slowly climb.
And don’t forget the monthly indexes from the Institute for Supply Management, which will indicate how the Trump administration’s tariffs affected Corporate America’s business activity and pricing power in April. The group’s manufacturing gauge is due May 1, and the services measure is out May 3.
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