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U.S. Economy Providing Ammo for higher interest rates

Monday, August 22, 2016  
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By Jeffry Bartash / Market Watch
August 21, 2016 / MSN Money

As the dog days of summer draw to a close, the economy appears primed for somewhat faster growth in the second half of the year that’s likely to pave the way for higher U.S. interest rates.

Hiring has accelerated after a spring pause, consumer spending is steady and shows no sign of slowing, the housing market is the best it’s been in years and even the struggling manufacturing sector appears to have stabilized.

A raft of new reports this week is likely to underscore a picture. Sales of new and existing homes recently hit fresh post-recession peaks, and although the main buying season is coming to an end as school starts, sales are expected to remain strong if a toucher lower in July. Orders for long-lasting or durable goods probably also rebounded in July after two straight declines.

Not all the news is cheery. Business investment, one of three key pegs holding up the U.S. economy, has been weak since 2015. It’s likely to be soft in July as well.

Core durable orders “have been dismal for the past year and we have not observed any signals that suggest a pickup is in sight,” UBS analysts wrote in a report.

Against that backdrop, Federal Reserve Chairwoman Janet Yellen on Friday is expected to signal that an increase in interest rates is coming — soon. She is the headline attraction in the resort town of Jackson Hole, Wy., the site of an annual central bank retreat.

Also read:Yellen to say ‘ready’ for another rate hike

Whether investors believe the Fed this time, however, is far from certain. The Fed has gone to the brink of rate hikes several times since 2013 — most recently in the spring — only to pull back.

“By now investors know the doves rule the FOMC henhouse,” said Sal Guatieri, senior economist at BMO Capital Markets.

The Fed’s biggest worry is not the U.S. economy, but the global one. China is still expanding but at the slowest pace in years. Europe has shown improvement but it’s still a lackluster performer, and U.K. Brexit vote continues to hang over the region like a dark cloud. Japan has stalled again.

“Japan has been in a long period of no growth,” noted Frank Friedman, chief financial officer of the global business consultant Deliotte LLP.

If the Fed raises rates, there’s a good chance it could increase the value of an already strong  and draw more foreign money toward the U.S. at a time when many other countries hunger for investment. A strong dollar could continue to depress Americans exports and business investment and hurt other economies.
Mindful of those worries, the Fed at its July meeting said it would evaluate the impact of a rate hike on the dollar and thus the rest of the world.

Still, the Fed’s main job is to make sure that U.S. inflation stays under wraps. While price pressures remain low, a tightening labor market could drive up the cost of wages and force the central bank to raise interest rates faster than it would like if it continues to put them off.

That’s been a recipe for recessions in the past — a mistake the Fed does not want to repeat.

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