The stock market breached a record and kept on going. Retail sales are surging. Factories are humming. The jobs market is at its strongest in a year. The consumer price index is 2 per cent higher than a year earlier, brushing the central bank’s target for the first time in four months.
When he was a professor at Princeton University, Federal Reserve chairman Ben Bernanke might have laid out such a scenario to describe for his students when a central bank should raise interest rates.
Yet that description isn’t theoretical. It’s essentially what Mr. Bernanke and the other members of the Fed’s policy committee will be looking at when they gather this week in Washington. But don’t expect a text-book response. The U.S. central bank almost certainly will keep policy where it’s been set for months: wide open.
The U.S. economy might be heating up, but it’s not hot.
Stock markets are strong mostly because the Fed’s policy of creating $85-billion (U.S.) a month to buy bonds is forcing investors into riskier assets. That’s exactly what the Fed wants. It needs the equity markets to pull the U.S. economy out of its doldrums.
But there still is a long way to go.
Employers added 236,000 positions in February, and now have created more than 200,000 jobs in three of the past four months. But a recovery generally is characterized by several examples of outsized monthly job creation of 300,000 or more. The U.S. economy has managed to create jobs at that pace only twice in the past two years. The unemployment rate sits at 7.7 per cent; the lowest in four years, but little changed from the readings of 7.8 per cent and 7.9 per cent that were posted over the previous five months.
Still, this week’s meeting, which concludes on Wednesday, will be watched closely. The minutes of the last policy gathering suggested a certain degree of angst over the Fed’s unconventional policies, as members appeared to split on the question of whether the central bank might be sowing the seeds of the next financial crisis. Economic theory holds that all that money should stoke inflation.
But inflation remains just that – a theoretical concern. The CPI was boosted in February by higher gasoline prices, which have since fallen. In congressional testimony last month, Mr. Bernanke said inflation was well contained. There’s no reason to think that opinion has changed. Also, Mr. Bernanke and other Fed officials have expressed a willingness to let inflation exceed their target if employment continued to languish. With the unemployment closer to 8 per cent than 6 per cent, it’s still a safe bet that inflation isn’t the Fed’s primary concern at the moment.