Federal Reserve officials meet tomorrow and Wednesday to accomplish two tasks: to set the course of interest rates and outline a view on the US economy.
The first job is easy. The Fed probably won't raise the overnight rate from 1.75 percent, a 40-year-low, until hiring and business investment increase, economists say.
"Two things are necessary before the Fed starts to raise rates: at least a leveling of unemployment and a pickup in capital spending," said Benjamin Herzon, an economist at Macroeconomic Advisers in St. Louis.
The Fed's second task is difficult. The recovery remains tentative enough that any suggestion of higher rates in the future may hurt the consensus that the economy is gaining strength. The statement released after the Federal Open Market Committee's meeting is likely to cite "balanced" risks between inflation and growth. Economists say this view is unlikely to change when Chairman Alan Greenspan goes before Congress in July to give the Fed's twice-yearly forecast.
The recovery is "neither gangbusters nor sub-par," said Kathleen Stephansen, director of global economic research at Credit Suisse First Boston Inc. "It is becoming harder, I guess, for Greenspan to explain what is going on."
The Fed will spend the first day of a two-day meeting this week outlining its presentation to Congress. The second day, it will decide on a target for the overnight rate.
Right now, some economic indicators are turning from declines to gains. Industrial production has risen for five straight months after five declines. Still, increases in everything from jobs to factory orders haven't taken up the slack in labor markets or industrial capacity.
In March and April combined, the US economy created 47,000 jobs. Trouble is, two months of payroll gains doesn't make up for the 1.76 million jobs lost over the previous 12 months.
While orders for factory goods have risen for three of the last four months, companies are meeting demand without making new investments in buildings or equipment. Such spending has fallen for six consecutive quarters.
"Companies are not yet comfortable with the sustainability of the US recovery," said Gregory Miller, chief economist at SunTrust Banks Inc in Atlanta.
The decline in stock prices this year may be damaging consumer confidence. At Friday's close, the Standard & Poor's 500 Index was down 14 percent for the year. Robert Parry, president of the San Francisco Fed Bank, said last week that doubts about the economic recovery "have been intensified by concerns about corporate accounting practices and about the recent declines in broad stock market indexes."
Fed officials say they will at some point have to raise the overnight rate, which has been at 1.75 percent since December. Parry called the current rate "stimulative" last week.
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