Economic Signs Should Keep Fed From Pushing Interest Rates Higher

Reports this week should show the U.S. economy continues to expand at a steady pace with no acceleration of inflation, giving the Federal Reserve no reason to boost borrowing costs, economists say.

The economy has begun picking up speed, led by optimistic consumers.

And though economists say there’s no sign the third-quarter growth rate will be high enough to trigger price increases, some investors have been spooked, pushing bond yields up and stock prices down in the past week.

“Maybe it’s time to get out the Ritalin so we can control the attention deficit disorder,” said Joel Naroff, chief bank economist at First nion in Philadelphia. “The fundamentals have not changed, and once investors begin to consider what’s really going on in the economy, conditions will stabilize.”

Analysts surveyed by Bloomberg News expect the Commerce Department to report Wednesday that retail sales rose 0.7 percent in July, an acceleration from June’s greater-than-expected 0.5 percent rise.

The same day, the Labor Department is expected to report the first increase of the year in producer prices and on Thursday the July consumer price index is forecast to show a 0.2 percent increase following June’s 0.1 percent rise.

Bonds began falling - pushing yields higher - after the government reported 10 days ago that the economy added 316,000 jobs last month and the unemployment rate fell for the second time in three months to 4.8 percent - a 24-year low. Another body blow came last week as Wall Street firms scrambled to unload $38 billion in three-, 10- and 30-year Treasury securities they bought at quarterly refunding auctions, sending yields even higher.

Bond yields have risen more than 30 basis points since July 31, the day before the employment report, when the yield on the Treasury’s benchmark 30-year bond fell to 6.30 percent, its lowest point since February 1996.

The bond’s yield rose to 6.68 percent Monday before falling back after Fed Gov. Susan Phillips, in the latest of a series of interviews, suggested Fed officials are in no hurry to raise interest rates. The yield was 6.62 percent at the close of New York trading.

The bond’s recovery helped stocks. The Dow Jones Industrial Average fell 64 points today before recovering to close at 8,062.11, a gain of 31 points.

Given the volatility of the past week, a larger-than-expected rise in July retail sales could cause more market havoc again - though it doesn’t necessarily mean higher prices will follow, analysts said. “Consumers aren’t dead. This isn’t a recession,” said Diane Swonk, deputy chief economist at First Chicago, NBD. “We had a weak spring, now we’re seeing some catch-up.”

Moreover, much of July’s retail strength was driven by strong auto and truck sales, where discount prices played a big role.

Outside the auto sector, sales are expected to rise 0.5 percent. That, too, is padded by discounts, analysts said.

“Clearance of summer merchandise is becoming increasingly important to a retailer’s bottom line during the third quarter,” said Tracy Mullin, president of the National Retail Federation.

“Nothing has changed,” said First Union’s Naroff. This week’s statistics, he said, will show the economy “is right now exactly as it was one, two, three and six months ago.”