Tuesday, May 20
Posted 2:00 p.m. Eastern

Producer prices heighten inflation worries

The Producer Price Index, or PPI, was released this morning, and while this reading is often overshadowed by the Consumer Price Index and certainly the Fed's favored gauge, the Personal Consumption Expenditures Index, this month it raises its own concerns.

The headline PPI was up a modest 0.2 percent in April, but that doesn't reflect the continued surge in oil prices we've seen this month. In the past 12 months, the headline PPI has advanced 6.5 percent.

The core PPI advanced a troubling 0.4 percent this month and is up 3 percent year over year. Further, the year-over-year core PPI has increased for four consecutive months. Not a welcome development.

Inflation is clearly a central issue to the health of the economy, not just now but looking ahead to the next few years. So what can the Fed do about it? Here are some sobering comments from Joel Naroff, president of Naroff Economic Advisors, on the subject.

"The Fed's tools are best suited to deal with inflation created by excess U.S. demand. That is hardly the case right now. If the commodity price increases are the result, at least in part, of surging foreign economies, then the only option the Fed has is to take out the sledge hammer and create a worldwide economic slowdown. I am not sure the Fed really wants to do that. And if some of the commodity price hikes are due to speculation, taking out the big guns would essentially wind up killing the victims. In the current circumstances the Fed may actually be limited in its ability to take effective action against the rise in inflation."

Monday, May 19
Posted 2:00 p.m. Eastern

Fed meeting minutes to be released this week

In contrast to the packed economic calendar of one week ago, this week's economic releases will be comparatively sparse. Most notable will be Wednesday afternoon's release of the April Fed meeting minutes. The Producer Price Index is slated for release tomorrow, but much of that thunder was stolen by last week's Consumer Price Index. While the CPI was seen as better-than-expected, a more accurate descriptor is "not-as-bad-as-it-could-have-been." Headline CPI was up 3.9 percent in the past 12 months and the core rate has advanced 2.3 percent in the same time period. Both are outside the bounds of what we would call "low inflation." The Fed is aware of this, and the meeting minutes to be released this week will be parsed to gauge whether the Fed has a balanced risk assessment between inflation and economic weakness.

Last week's economic releases were a mixed bag. Retail sales, excluding autos, gave reason for hope as it showed strong advances in April on top of upward revisions to March sales. The consumer isn't dead, folks.

But a couple of readings late in the week - industrial production and the Philadelphia Fed's Business Outlook Survey - were poor, which kept the pendulum of economic sentiment swinging.

Interest rates have increased by a substantial margin since the March lows, when the outlook was for something akin to financial armageddon. The absence of further upheaval in credit markets has vanquished the worst-case scenario as the prevailing sentiment and while the credit markets are still hampered, the outlook is now more positive. Consequently, yields for both Treasuries and CDs have moved up in recent weeks but still remain very low considering the current level of inflation.

For the Fed to remain on hold with interest rates requires no additional deterioration in the overall economy or the conditions in financial markets. Inflation figures might suggest a quick turnaround by the Fed toward raising interest rates, but the economy, housing market and upcoming presidential election provide little latitude to do so. The Fed continues to state their belief that inflation will moderate on its own in the coming months. They'd better be right.

Wednesday, April 30
Posted 9:30 a.m. Eastern

Today is Fed day

The two-day Federal Open Market Committee meeting ends today, culminating in an announcement at 2:15 p.m. Eastern. Look for an interest rate cut of one-quarter percentage point and some softer language in the first paragraph of the accompanying statement to convey a "wait-and-see" approach to further Fed meetings.

The first look at Gross Domestic Product, or GDP as its called by economists and anyone that doesn't want to type out the full name in his or her blog, was released this morning. As measured by GDP, the economy eked out a gain of 0.6 percent in after-inflation terms during the first quarter. This is the same rate that was posted in the fourth quarter, and although it will be revised twice more in the coming months, gives the Fed sufficient leeway to make a smaller quarter-point cut at this meeting and adopt a somewhat softer stance with regard to further interest rate cuts.

There is a bevy of economic data to follow the Fed the remainder of this week. March personal income, personal spending and core PCE inflation (the Fed's favorite) will be released tomorrow and the employment report for April comes Friday morning.

Check back to Bankrate.com this afternoon following the Fed announcement for the very latest.

Fed Outlook archive