More importantly, other factors could persuade the Fed to be
more patient about raising rates than Wall Street or Main Street
expect.
1. Growth Is Flagging
After finishing 2014 strongly, consumers have been cutting back.
Even with a rebound in gas prices, retail sales were down in
February. More troubling, auto sales, which have led the
economic recovery, fell in each of the last three months.
Consequently, first quarter GDP growth will be less than 2
percent, and the stronger jobs growth of recent months will
prove hard to sustain.
Forecasters do expect consumers to pick up the pace this spring,
but wages have not been rising much, and Americans have grown
more cautious about building up credit card debt.
2. Slow Growth Abroad and a Strong dollar
Growth in Europe and Japan will be below 1.5 percent, and China
continues to encounter structural difficulties, challenges
implementing reforms and slowing growth. Consequently, the
European Central Bank and monetary authorities in Japan and
China are printing a lot of money, and that pushes up the value
of the dollar against their currencies.
Since January 2014, the exchange rate for the dollar, as
measured across all U.S. trading partners, is up more than 15
percent. U.S. firms like Ford and U.S. Steel face a rising tide
of lower-cost foreign products, and U.S. exporters must slash
prices to keep market share abroad.
In the last year, the inflation-adjusted value of imports was up
5.2 percent, whereas real exports increased only 2.9 percent.
Against this background, forecasts that U.S. GDP will accelerate
above 3 percent this year seem a bit rosy and the Fed takes a
big risk if it starts pushing up rates too soon or too quickly.
3. Unemployment Remains a Problem
The headline unemployment rate, which only focuses on adults in
jobs or actively seeking employment, is 5.5 percent, but the
labor market still has a lot of slack.
Record numbers of adults between the ages of 25 and 54 —
generally beyond college age and too young to retire — are
sitting on the sidelines. Were the same percentage of adults
looking for work today as when President Obama took office,
unemployment would be 9.7 percent.
Many college graduates who entered the labor force in the years
following the financial crisis remain underemployed — working as
Starbucks baristas and in similar positions that do not require
the special skills higher education imparts. With stronger
growth, they could move on to professional careers and free up
opportunities for workers with less education.
4. Inflation Is Likely to Remain Subdued
A lot has been made of the contribution of falling oil prices to
low inflation, but the dominant factor keeping prices down at
home and abroad is too much supply and not enough demand.
During the last year, U.S. productivity has not advanced and
outside of manufacturing, it has actually fallen. Given that
advances in computer technology, software and other innovations
increase potential productivity each year, this situation tells
us many factories, restaurants and the like have a lot of
underutilized capacity that could accommodate more customers
without adding more employees. If they got more business, they
could spread overhead and employee costs over a wider base and
increase profit margins without increasing prices.
When the Fed policy committee meets again this June, it will
more likely see a U.S. economy struggling to regain the
momentum, against the backdrop of slow growth abroad and a
strong dollar, continuing labor market slack and low inflation.
Pressures will remain strong for the Fed to push a decision on
raising rates into later this summer or fall.