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Fed takes poor GDP in stride, leaves interest rate outlook unchanged

Summary

The Federal Reserve maintained its course toward higher interest rates in 2015, downplaying a poor first-quarter showing by the economy

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The Federal Reserve Wednesday maintained its course toward higher interest rates in 2015, following a bad report card on the economy’s first-quarter performance.

In a statement concluding its two-day meeting April 30, the rate-setting Federal Open Market Committee affirmed guidance that points to a hike in interest rates around the middle of next year.

The committee also issued its take on the progress of the economy, saying that activity “has picked up recently, after having slowed sharply dudring the winter months, in part because of adverse weather conditions.” The statement appeared to downplay the importance of gross domestic product figures released earlier Wednesday, which showed the overall economy generated nearly zero growth in the first quarter.

The federal funds rate, the Fed’s main lever on short-term rates in the economy, remains set at a range between 0 percent and 0.25 percent, where it has been since late 2008 to spur the economic recovery. Increases in the historically low rate will almost certainly lead to corresponding increases in credit card APRs, as the price of money resets throughout the economy.

The FOMC repeated language it used in its March statement saying that rate should remain near zero for a “considerable time” after the end of is asset purchase program — the program of buying longer-term bonds to bolster the housing market. Remarks in March by Fed Chair Janet Yellen put the time frame for rate hikes around spring or summer of 2015, depending on the performance of the economy. However, the Fed stayed away from references to a specific unemployment rate as a threshold for rate decisions, which it had dropped from its March announcement.

“You can’t commit to a path for policy when the only thing you know about the economy is that it’s not going to evolve the way you think it will,” said Richard Moody, chief economist for Regions Bank.

The Fed continued to “taper” its bond purchases, announcing another $10 billion reduction in monthly purchases, to $45 billion. The move was the fourth cut in purchases since the Fed began the taper in December 2013, keeping the program on track to finish by the end of the year.

Economic growth nearly freezes
On Wednesday, a new look at the economy’s performance in the first quarter did nothing to suggest that rate hikes will be needed to cool things down anytime soon. Growth was a measly 0.1 percent annualized in the first three months of the year, according to the Commerce Department’s advance estimate of gross domestic product. That fell far short of consensus projections around 1 percent. However, analysts said that the initial figures — which could be revised substantially — do not mean the recovery is out of steam.

“Much of the weakness can be chalked up to weather, which distorted activity in January and February,” James Marple, senior economist at TD Economics, said in a research note. Despite the unusually harsh winter, consumer demand held up well, he said. Consumer spending grew at a 3 percent clip, but weakness in export sales and government spending held back growth. Price inflation was 1.4 percent annualized, below the Fed’s long-run target of 2 percent.

Housing remains a question mark over the economy, following a disappointing showing in March, when new home sales fell 14.5 percent. The result, the slowest pace since in more than a year, caused concern that home demand might be slipping into a funk.

Young people, burdened by student loans and facing a slow job market, are understandably less eager to jump into the housing market and take on a mortgage, economists say. The rate of household formation “is nowhere near normal,” Moody said. “You have a large percentage of young people living at home.”

Homebuying should pick up when the job market does, he said, intensifying the focus on job creation and the unemployment rate, which came in at 6.7 percent for March.

“The indicators to watch for now are the strength in the labor market,” Marple said, “and how quickly the housing market bounces back from its recent slowdown.”

See earlier story:Fed holds course toward higher interest rates

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