Federal Reserve blames 'transitory factors' for US economic slowdown

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“Transitory factors” are to blame for the recent slowdown on the US economy, the Federal Reserve said on Wednesday.

In a statement released after the latest two-day meeting the Federal Open Markets Committee (FOMC) the central bank brushed off recent bad news and left open the possibility of raising interest rates, a hike that would be the first in almost a decade.

The Fed meeting ended as the Commerce Department announced that US gross domestic product (GDP) had slowed to a crawl in the first quarter. After growing at an annual rate of 2.2% in the last three months of 2014 it slowed to just 0.2% in the first three months of 2015.

Last month the Labor Department announced the US added just 126,000 new jobs in February, half what had been expected. The latest jobs report is out next Friday.

The extreme winter weather, strong dollar and collapsing oil prices that have stalled the US’s energy boom contributed to the slowdown. “Economic growth slowed during the winter months, in part reflecting transitory factors,” the Fed said. While growth and employment had slowed officials said they expected a return to a modest pace of growth and that the job market could continue to improve, “with appropriate policy accommodation”.

Dan Greenhouse, chief strategist at broker BTIG, noted that the Fed had removed a sentence it used in its last statement that said there was unlikely to be a rate hike after the next meeting. “Without that sentence, the June meeting is theoretically ‘live’ although we doubt, given the downbeat tone in the first paragraph, that a hike in June is forthcoming,” he wrote in a note to clients.

US stock markets are at or close to record highs with economists arguing much of those gains have been driven by the Fed’s policy of keeping rates close to zero and its giant economic stimulus program.

In 2013 stock markets threw a “taper tantrum” when the Fed chairman suggested he could end the quantitative easing (QE) stimulus program earlier than expected. QE is now over but some market watchers fear markets could be rocked again if and when the Fed moves to raise rates.

“Given the importance of the first rate hike, which would be the first policy tightening in almost a decade, the conventional wisdom is that the Fed would then wait until at least September, which would be the next FOMC meeting with a scheduled press conference,” Paul Ashworth, chief US economist wrote in a note to clients.

“We wouldn’t completely rule out a late July hike, however, since Fed chair Janet Yellen could use her semi-annual congressional testimony in mid-July to flag such a move ahead of time. Either way, we still think the Fed will start to raise rates in the second half of this year and, as wage growth and price inflation rebound, we anticipate that rates will rise much more rapidly next year than either the markets or the Fed currently expect.”

Powered by Guardian.co.ukThis article was written by Dominic Rushe in New York, for theguardian.com on Wednesday 29th April 2015 20.55 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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