Consumer Demand, Interest Rates Seen Rising
Reports coming Wednesday on U.S. durable goods orders and home resales in July are expected to show consumer demand driving the economy ahead. On Tuesday, Federal Reserve policymakers might decide that the economy is moving too fast and raise interest rates to slow things down.
Factory orders for cars, washing machines and other big-ticket items designed to last several years probably rose 0.8% in July, after a 0.4% increase in June, according to the average of analysts’ forecasts. And the sales pace for previously owned homes last month probably leaves 1999 on track to be another record year for housing.
Little evidence of tempered demand is why most analysts expect Fed Chairman Alan Greenspan and his central bank colleagues to raise interest rates when the Fed’s Open Market Committee meets Tuesday. A Bloomberg News survey of banks and securities firms that trade directly with the Fed shows 29 out of 30 expect a quarter-percentage-point increase in the target rate for overnight loans between banks to 5.25%. The Fed might also raise its discount rate--what it charges to banks for short-term loans--from 4.5%, the survey found. And central bankers are likely to remain neutral on future interest-rate policy, analysts said.
The committee adopted the same wait-and-see stance when it raised the overnight bank rate to 5% on June 30. The committee will release the minutes from the June meeting on Thursday.
Heading into Tuesday’s meeting, policymakers’ main focus will be the tight labor market, evidenced by an unemployment rate close to a 29-year low and average hourly earnings growing at the fastest pace since January, analysts said.
Evidence that the economy could be slowing is expected in the Commerce Department’s report Thursday on second-quarter economic growth. Analysts expect that gross domestic product expanded at a 2% annual rate from April through June, down from an initial estimate of 2.3%. And the GDP price deflator, a measure of inflation followed by many investors, probably grew at a 1.6% annual pace, the same as initially reported.
On Friday, the Commerce Department is expected to report that personal spending rose 0.5% in July, after rising 0.3% in June. And the report will probably also show that personal incomes rose 0.4% in July following a 0.7% gain the previous month. If it’s in line with expectations, July would mark the seventh consecutive monthly gain in personal incomes, and more money in consumers’ pockets is expected to boost spending.
