Fed drops rate hike talk after economic growth slows
WASHINGTON – The Federal Reserve downgraded its view of the U.S. economy Wednesday after a winter in which growth nearly froze. The Fed offered no sign that a rate increase might be coming soon.
On a day when the government estimated that the economy barely grew in the January-March quarter, the Fed acknowledged that economic barometers have weakened of late, in part because of temporary factors. It noted in a statement that growth has slowed, business investment has softened and exports have declined.
It also reiterated that before raising rates, it needs to be “reasonably confident” that low inflation will move back up to the Fed’s 2 percent target.
In its statement, the Fed removed all calendar references – a message that any move to raise its key rate from a record low near zero will hinge entirely on what the economic data show.
The only parts of its policy statement the Fed changed Wednesday dealt with its assessment of economic conditions. It said growth has “slowed during the winter.” That was a downgrade from its March statement, which said growth had “moderated somewhat.”
But the Fed partly blamed “transitory factors” for the deceleration and stressed that it expects the economy to expand moderately.
David Jones, an economist who has written several books on the Fed, said he thinks a rate hike is unlikely until September. Still, he foresees a pickup in growth and a rate increase by fall.
“I think the Fed believes most of the slowdown will be temporary,” Jones said. “There will be a bounce back in growth in the second quarter, and that is why I think the Fed will start raising rates in September.”
Earlier Wednesday, the government estimated that the economy grew at a barely discernible annual rate of 0.2 percent in the January-March quarter, battered by harsh weather, plunging exports and scaled-back energy drilling. It was the poorest showing in a year and was down sharply from a 2.2 percent annual rate in the fourth quarter.
Stocks dropped on the disappointing economic news and remained low after the release of the Fed’s policy statement.
Among the areas of the economy that may have weakened is the job market. U.S. employers added just 126,000 workers in March, the fewest since December 2013, breaking a 12-month streak of gains above 200,000. Gauges of manufacturing, housing and consumer spending of late have also been weak to modest.
The Fed’s unanimous decision Wednesday means it will keep its key rate near zero, where it’s been since December 2008. That’s when the Fed slashed the rate as low as it could to support an economy heading into the deepest recession since the 1930s.