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By Lucia Mutikani
June 19, 2011 5:21 PM EDT
The U.S. economy has slowed in recent months, but underlying inflation pressures are rising. How will the Federal Reserve respond?
With the global data calendar light this week, that is the key question many will want answered by policymakers at the U.S. central bank after they meet on Tuesday and Wednesday.
Since their last meeting in April, U.S. economic data has taken a decisively weak tone. But at the same time, there is no evidence that things are falling apart.
"The key questions will be about how the Fed views the present combination of weak growth and higher-than-expected inflation," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.
"Does the Fed still expect growth to pick up after a soft first half? Is it still confident that the upward creep in core inflation will be contained?"
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Culprits for the weakness in the U.S. economy abound. First it was bad winter weather; then the so-called Arab spring, which pushed up gasoline prices; and finally Japan's earthquake and tsunami, whose disruptive effect on manufacturing surprised economists with its virulence.
Employment stumbled in May and manufacturing braked sharply, while a pick-up in core inflation gathered speed.
But on the other side of the coin, factors that hampered growth are loosening up.
"The Fed is going to acknowledge that the economy slipped into a soft patch, but they will argue for some reacceleration of activity in the second half of the year," said Christopher Probyn, chief economist at State Street Global Advisors in Boston.
The U.S. central bank is expected to confirm its $600 billion government bond-buying program will conclude at the end of the month, as scheduled. The Fed, which has been criticized for risking inflation, has set the bar very high for any more monetary stimulus.
While core inflation is rising, motor vehicle shortages bear part of the blame, and the increase is not yet seen as a threat to the economy. At the same time, the overall inflation picture is improving as gasoline prices retreat.
GROWTH FORECASTS TRIMMED
Signs of economic slowdown have also been evident in other advanced economies. On Friday, the International Monetary Fund warned of threats to world growth, citing the euro zone debt crisis and signs of overheating in emerging market economies.
It trimmed its forecast for 2011 U.S. growth but raised its euro zone projection. But even in Europe, sentiment is souring due to the troubling sovereign debt crisis.
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