As the end of the Fed's QE II program comes into sight, the Fed is facing an economy that is not performing up to expectations.
When the Federal Open Market Committee last met on April 27, it saw the economic recovery as proceeding at a moderate pace, with household spending and investment in equipment and software expanding steadily, and the labor market improving gradually.
But in his June 7 speech on the U.S. economic outlook, Fed chairman Ben Bernanke had to acknowledge that the labor market has lost some momentum, and that growth this year has been slower than expected.
However, he said that he still expects growth to pick up in the second half of the year as the effects of the Japanese disaster on manufacturing dissipate, helped by some moderation in gasoline prices. And he gave no indication that the Fed will try to ride to the rescue by launching QE III.
A number of key releases due in the upcoming week will still be in focus when the FOMC meets again June 21-22. The two most important inflation releases, the PPI (Tuesday, June 14) and the CPI (Wednesday, June 15) will show headline inflation decelerating sharply in May because of declining energy prices.
May retail sales (Tuesday, June 14) will be dragged down by declining auto and gasoline sales. Industrial production (Wednesday, June 15), slowed by disruptions related to the Japanese earthquake/tsunami, should manage to eke out a small gain in May.
Housing starts (Thursday, June 16) in May should also post a small increase, with the gains coming mostly from the multi-family category. Finally, June consumer sentiment (the preliminary reading, due Friday, June 17) is expected to drop on recent news, which has been more bad than good.