When will the Fed stop hiking interest rates? That's a big question among economists right now. The hope is that this week's economic data and appearances by Fed Chairman Ben Bernanke will provide some clarity ahead of the Aug. 8 monetary policy meeting.
Chairman Bernanke will take center stage this week as he marches up to Capitol Hill to present the central bank's semi-annual monetary policy report to Congress. His trip could be quite interesting, as the June figures on consumer prices come out July 19 as well. Following the Fed's June 29 monetary policy meeting, the central bank stated that some inflation risks remain due to high levels of resource utilization and elevated energy prices.
Since then, oil prices have risen above $75 per barrel. And the June report on industrial activity, which comes out July 17, is expected to show a healthy increase in output. Indeed, the May trade report showed that stronger economic growth abroad is driving increased demand for goods, especially capital equipment and industrial materials. The rise in June industrial output will likely increase capacity utilization rates as well.
But the central bank also wrote in the June 29 post-meeting statement that it expects economic growth to moderate, helping to "limit inflation pressures over time." One expected source of slower growth is the housing market. In his January testimony before Congress, Bernanke stated that given the surge in housing activity during recent years "[home] prices and construction could decelerate more rapidly than currently seems likely."
That hasn't happened yet, but markets will be looking at the June housing starts data closely to see if the rapidly deteriorating sentiment reflected in the National Association of Home Builders' Housing Market Index is going to translate into a sizeable pullback in new construction.
As Bernanke wraps up his second day of testimony, analysts will be reading the minutes from the June 29 monetary policy meeting. The report will be used to help gauge where other members of the Open Market Committee may stand on an August rate hike. Right now, the consensus view among economists and the financial markets is that the Fed will finally pause, but that view could quickly change.
Here's the lineup for the coming week, from Action Economics: