1st Quarter GDP and April FOMC Statement

1st Quarter Gross Domestic Product (GDP) was disappointing, growth was reported at 0.2% annual rate, well below expectations heading into the year. Consumer spending fell, Business investment fell, Government spending fell, exports were down and business inventories rose. Additionally, most economic data including retail sales, business investment and manufacturing output has been weak, pointing to perhaps continued weakness in the 2nd quarter. This continues a familiar pattern for the past six years – the economy stumbles through the winter months, destroying hopes for a sustained and improving economy able to withstand higher interest rates, the so called Fed “Liftoff”. The Fed has kept rates near zero since December 2008, to help the economy recover from the financial crisis and recession, but the economy continues to underperform.


And as if to seal the deal, the GDP report happened to coincide with the Fed’s April Federal Open Market Committee (FOMC) meeting. Their policy statement recognized a slowing economy, stalling job-market and continued weak inflation. All below their forecasts. The Fed seems to be less certain as to when the economy will reach “Liftoff” speed and uncertain about future rate hikes. As they have for the past six years, the Fed credits weakness to temporary factors and expects growth, jobs data and inflation to recover once these temporary factors improve. These temporary factors include a stronger dollar, weak oil and commodity prices – and along with winter weather will prove themselves to be transitory.

The expectation for Fed rate hikes continues to be delayed as expectations heading into 2015 were calling for interest rate increases to begin in the 1st or 2nd Quarter, now markets expect a 4th Quarter hike and many are now calling for delays until 2016. The Fed has dropped its calendar based forward guidance and is focusing itself and markets on the economic data, so follow the data.

Here is the full statement from the Federal Reserve’s policy-making committee.

“Information received since the Federal Open Market Committee met in March suggests that 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. Growth in household spending declined; households’ real incomes rose strongly, partly reflecting earlier declines in energy prices, and consumer sentiment remains high. Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined. Inflation continued to run below the Committee’s longer-run objective, partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Although growth in output and employment slowed during the first quarter, the Committee continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced. Inflation is anticipated to remain near its recent low level in the near term, but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Jeffrey M. Lacker; Dennis P. Lockhart; Jerome H. Powell; Daniel K. Tarullo; and John C. Williams.”