The Federal Reserve ended a two-day meeting Wednesday with little hint of when it will begin lifting its benchmark interest rate, instead noting in a statement a softening economic outlook it thinks is due to transitory issues.
Since Fed governors last met in March, the statement said, “economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated, and the unemployment rate remained steady. A range of labor market indicators suggests that underutilization of labor resources was little changed.”
The Fed meeting was closely watched for signs of whether the rate-setting Federal Open Market Committee would commit to the first rate increase since June 2006. Rates fell as the economy deteriorated and amid the U.S. financial crisis were lowered to effectively zero in December 2008.
Weak first-quarter growth due to what it called “transitory factors” no doubt weighed on the Fed, which has said it will make its decision on rate hikes – which influence borrowing costs across the economy – based on incoming data. The Bureau of Economic Analysis earlier Wednesday reported that the economy grew by a dismal annualized rate of 0.2 percent from January through March, not the 1 percent forecast by most analysts.
At the year’s start, mainstream forecasters were expecting the Fed to begin the so-called liftoff for interest rates in June. But as the first quarter approached its end, September became the common view. There was little in the Fed statement to guarantee that liftoff date either. The Fed’s statement, which had no dissenting view, effectively bought time to sort out conflicting data points.
“Growth in household spending declined; households' real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high,” the Fed said of mixed indicators. “Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined.”
Also arguing against any swift move to higher rates, the Fed noted inflation remains below its long-run target of 2 percent. Rising inflation would be a sign for the Fed that the economy is heating up and interest-rate hikes were needed to thwart rising prices across the economy.
Many analysts still expect September to be the start of a gradual process of hikes to eventually return rates to historical norms.
“If there was one takeaway from today’s FOMC statement it is that the Fed is not giving up on the US consumer,” observed Neil Dutta, head of U.S. economic research for Renaissance Macro Research. “While noting that the growth in housing spending declined, the FOMC went to great lengths to lay out the bullish case, noting that real incomes are up strongly and that consumer sentiment remains high.”
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