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Yellen testimony could give clues on rates

Could the Federal Reserve raise interest rates again as soon as March? Many economists don’t think so, but San Francisco Fed President John Williams recently suggested a March hike isn’t off the table. Fed Chair Janet Yellen’s testimony before Congress this week could provide some clues. And the first big batch of data for 2017 – on retail sales, inflation, housing starts and industrial production – could reveal whether growth appears solid enough to warrant another Fed move.

In a recent speech, Yellen hewed to a middle-ground position, saying she doesn’t want to run a “hot economy” that invites runaway inflation by keeping rates low too long, but advocates raising rates gradually to avoid derailing the recovery. In December, when the Fed lifted its benchmark rate for the first time in a year, central bank policymakers raised their median forecast to three hikes in 2017, up from their estimate of two previously. Many economists say those moves will be backloaded to the second half of the year, when President Trump’s proposed fiscal stimulus could begin to juice growth.. But a March increase would allow the Fed to spread out the three potential hikes throughout the year. Her testimony before a Senate committeeTuesday (and a House panel Wednesday) could clarify the outlook.

A big reason Fed officials are looking to hoist rates is that inflation is finally edging up. Much of that can be traced to rising gasoline prices, which are volatile. But a core measure of inflation, which excludes food and energy, has increased slowly but steadily. Economists estimate the Labor Department will report Wednesday that pump prices pushed up annual inflation last month to 2.4% from 2.1% while the core reading was stable at 2.2%.

Auto sales and higher gas prices have propped up retail sales recently, but core sales – which excludes volatile items such as autos and gas – has been tepid. Yet consumers are still enjoying solid job and income growth. And retail payrolls increased sharply last month. Economists expect the Commerce Department to announce that retail sales ticked up 0.1% in January as auto purchases softened but the core measure increased a solid 0.3%.

Industrial production increased substantially in December as the oil sector’s comeback and strong auto production bolstered factories. But vehicle-making fell sharply last month, notes Nomura economist Lewis Alexander. Economists expect the Fed to report  industrial production was flat in January.

Housing starts rose sharply in December and recorded solid growth the past year. Usually warm weather likely helped single-family starts last month while volatile multifamily starts likely declined, Alexander says. Economists expect Commerce to report Thursday that housing starts increased 0.3% in January to a seasonally adjusted annual rate of 1.2 million.