Federal Reserve policymakers are meeting to consider whether to open the door to raising interest rates as early as June. Falling unemployment favors higher rates but inflation remains well below the Fed target of 2 percent.
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 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 shares abroad.
Over 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 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.
