On Wednesday, the Federal Reserve said it expects moderate economic growth despite first quarter’s weak results. Options remain open for timing on interest rate hikes.
The Federal Reserve said on Wednesday that it expects ‘moderate pace’ economic growth despite the first quarter’s weak data. Based on this, the central bank kept options open on the timing for its first interest rate hike since 2006.
In their latest policy statement, announced after a 2 day meeting, Fed officials stated that although the 1st-quarter showed a growth slowdown in output and employment, expectations from the committee continue that with the right policy accommodation, activity in the economy will expand at a moderate pace as indicators from the labor market continue to move to levels the Fed says are consistent with their dual mandate.
The officials further stated that part of the slowed growth in the 1st quarter was due to ‘transitory factors’. For the first time the Fed acknowledged that ‘non-energy imports’ were the factors keeping inflation under the annual target of 2%, a disguised reference on how the strong U.S. dollar (USD) impacted the economy.
The statement from the Fed is consistent with its Chairwomen, Janet Yellen’s intentions to be dependent on data in deciding when to increase interest rates, including that the decision will be made on a meeting-by-meeting basis. Adding to this, the Fed has made it clear that from this point onwards a rate increase will be tabled at all meetings.
Officials from the Fed say that before further raising the interest rates they want to see more improvements in the labor markets ensuring that the lower inflation is stabilizing.
According to a chief economist at Northern Trust, Carl Tannenbaum, the statement from the Fed seems to be a clear downgrade of the economic conditions in the U.S, and it also gives some insights to ‘reduced urgency’ about hiking interest rates. According to other economists, the Fed was dismissive of weaknesses in the 1st quarter’s performance.
A chief economist at FAO Economics, Robert Brusca said that many, including the Fed are surprised because they thought momentum was beginning to form in the economy.
The weaker than expected data on industrial production and consumer spending only saw the economy adding 126 000 jobs in March. Also, the Commerce Department released data indicating a weak annual growth rate of only 0.2% in the first quarter.
Analysts say that based on the recent signs of weakness in the economy makes a move in June unlikely. However, they cautioned that before that meeting another 2 job reports will be announced that could hold potential to sway conventional wisdom
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