Fed likely to raise rates for the third time this year

An anticipated Federal Reserve interest rate hike is the centerpiece of this week’s economic news. Fed policymakers, along with many economists, are puzzled by wage growth and inflation that remain modest despite a 17-year low in unemployment. But they’re holding to the belief that worker shortages will eventually drive paychecks and consumer prices higher.

The Labor Department’s report early Wednesday on the consumer price index in November could provide the Fed some additional ammunition for its rate increase. But don’t bet on it. Overall inflation likely was driven higher by a surge in gasoline prices. Fed officials, however, prefer to focus on a core reading that excludes volatile food and energy items.

A Fed rate hike later that day appears all but certain, with futures markets giving the move 90% odds. It would be the Fed’s third quarter-point bump this year. The press conference after the meeting will likely be the last for Fed Chair Janet Yellen. Fed Governor Jerome Powell is expected to be confirmed by the Senate and take the helm in February.

Retail sales have been healthy in recent months as consumers benefit from solid job and income growth. Economists expect the Commerce Department on Thursday to announce that both overall retail sales and a core measure that excludes volatile categories such as orders and gas increased a sturdy 0.3% in November. The report will be watched closely because it includes the start of the holiday sales season.

Industrial production has been on a roll, with manufacturers riding an improving global economy. Automaking likely retreated last month, but crude oil production and electricity usage probably picked up, Alexander says. Economists expect the Fed on Friday to record a moderate 0.2% rise in industrial production for November.