Economy Growing Moderately, Fed Says
The U.S. economy grew at a moderate pace in March and April, with stronger activity in retail sales, real estate and even manufacturing, the Federal Reserve said Wednesday in reporting the results of its latest survey of regional economic conditions.
The Fed report shows few signs of inflationary pressures, and it treats the recent spurts in gasoline and food prices as temporary.
Its benign view of U.S. inflation was credited with helping to set off a big rally in financial markets Wednesday as investors became less worried that the central bank might raise interest rates at its next policy-setting meeting, on May 21.
“The new report is confirmation that the Fed doesn’t feel we are in a runaway growth period,” said David Wyss, chief financial economist at DRI-McGraw Hill Inc. in Lexington, Mass. “They made it very clear that they are not concerned with inflation yet and what we have seen are isolated price increases they can live with.”
According to the survey, the Fed banks in all 12 districts except New York reported a pickup in economic activity during March and April, with most reporting strength in retail sales and manufacturing. An excess of unsold inventories has been depressing manufacturing production for much of the last 12 months.
The Federal Reserve Bank of San Francisco, whose region is the West, reported that retail sales firmed slightly and that services expanded at a brisk pace. Manufacturing activity was mostly solid, and the banking and real estate markets were very active. Wage and price increases continued to be moderate, with the notable exception of gasoline prices in California.
The prices of gasoline and some food products have been surging in recent weeks, but the central bank is taking the view that the spurts are likely to be temporary and will not lead to a spiral of overall inflation.
“Price pressures remained generally subdued, and there were only scattered reports of wage pressures despite continued tight labor markets and somewhat stronger economic growth,” the central bank said. “Most districts reported little upward pressure on prices other than sharply higher prices for grains and energy-related items.”
The Fed survey, known as the “beige book,” is prepared eight times a year in advance of meetings of the Federal Open Market Committee, the panel of Fed governors and regional bank presidents that meets eight times a year to determine interest rate policy.
After the government last week reported a surprisingly rapid rebound in the overall economy, some forecasters began to worry that the Fed might decide to raise rates at the May 21 meeting. But forecasters said the latest beige book findings should put those fears to rest. Many economists say the central bank could well leave rates unchanged until after the November presidential election.
The Fed reduced short-term interest rates in July, December and January in an effort to keep sluggish growth from becoming a recession.
Economists earlier this year were predicting that more rate reductions were ahead, but they’ve since changed their minds as signs have appeared that the economy is improving.
