Research and Statistics

With economy slacking, Fed leaves interest rates alone for now


The economy slowed in the first quarter, giving the Federal Reserve room to hold interest rates at rock-bottom lows

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Interest rate setters at the Federal Reserve acknowledged Wednesday the economy has hit a lull, and indicated that there’s no rush to raise short-term interest rates from their historic low levels.

Since its last meeting in March, data  “suggest that economic growth slowed during the winter months,” the Federal Open Market Committee said Wednesday in its monetary policy statement at the end of a two-day meeting. However, the slowdown partly reflects temporary factors, the statement said.

The rate-setting committee voted to leave the target federal funds rate at 0 percent to 0.25 percent, the ultralow level that the benchmark has maintained since late 2008. Fed Chair Janet Yellen has said that June is the earliest the committee would consider a rate increase, but most economists now predict that the “liftoff” of higher rates won’t occur until autumn. A later date would be good news for credit card users who carry a balance, as a hike in the federal funds rate will almost immediately translate to higher interest rates on variable-rate cards.

“The case for a June rate hike has never been very strong in our opinion,” TD Economics Senior Economist James Marple wrote in a recent research note. Job creation in April and May will be an important factor in the FOMC’s rate decision, he added.

The FOMC has two goals: to support maximum employment and keep inflation from setting off a spiral of rising prices. Since the Great Recession, getting people back to work has been the big task, so rates were set low to spur economic activity.

Inflation is running below the Fed’s long-run target of 2 percent annual price increases, meaning the economy still has room to grow. The Fed wants to see that slack taken up, bringing more people back to work. The unemployment rate was only 5.5 percent for March, but a high number of long-term unemployed — 2.6 million people — points to a problem in the job market. The long-term unemployed, out of work for 27 weeks or more, aren’t simply caught between jobs, and they make up about a third of the total unemployed.

The Fed’s monetary policy statement came hours after the Commerce Department reported that economic growth slowed sharply in the first quarter of the year. Gross domestic product rose at an annual rate of only 0.2 percent in the January-February-March period, off the pace from 2.2 percent in the fourth quarter of 2014. Consumer spending slowed to a 1.9 percent annual rate, from 4.4 percent in the previous quarter.

“The U.S. economy got off to a miserable start in 2015,” Regions Bank Chief Economist Richard Moody said in an analysis, while adding that the government’s initial estimate is subject to two rounds of revisions.

Some temporary factors contributed to the poor showing, raising hopes that the slowdown isn’t the start of a trend. A port strike on the West Coast, unusually harsh weather in parts of the country, and sharply declining investment in oil and gas production all put a damper on activity, Moody said.

And while consumers spent less, their disposable income was up a strong 6.2 percent, after adjusting for inflation, compared to 3.6 percent in the fourth quarter.

“If weather is to blame, spending will bounce back in months ahead,” Marple wrote. “Indeed, the strength in real income growth is perhaps the best reason for optimism that the setback in growth will be temporary.”

Previous Fed meeting:Fed signals step toward higher rates

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