The US economy nearly froze in the glacial first quarter, but emerging signs of vigor kept the US Federal Reserve on its stimulus-tapering track on Wednesday.
The Fed shrugged off the shockingly weak 0.1 percent annual growth rate of the past quarter, reported earlier in the day by the US Department of Commerce.
The Federal Open Market Committee, led by Fed Chair Janet Yellen, concluded after a two-day meeting that the economy remains in fairly good shape — able to handle the ongoing cutback in the Fed’s bond-buying stimulus program, but still in need of a near-zero interest rate.
Economic activity “has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions,” the committee said in its policy statement.
The first-quarter slowdown from a 2.6 percent expansion in the fourth quarter of last year was much worse than analysts expected; the average estimate was for a 1 percent rate.
However, this was a rear-view mirror look at the economy, and for the Fed, most of the recent signposts were pointing to “moderate” growth and a gradual improvement in the jobs market.
As generally expected, the committee ordered another US$10 billion cut in its bond-buying program, which has aimed at holding down long-term interest rates to encourage hiring and investment.
That took the quantitative-easing program to US$45 billion a month, beginning this month, down from US$85 billion in December last year, when the stimulus taper was launched.
However, it left the benchmark federal funds rate between zero and 0.25 percent — where it has been since the end of 2008 — saying that inflation is restrained while unemployment “remains elevated.”
“The Fed has been largely correct that the weakness we saw earlier this year would be temporary. Already, we’ve seen rebounds in retail sales, motor vehicle sales, business capital spending and payroll employment in March,” IHS Global Insight’s Paul Edelstein said.
The committee statement, little changed from March, did not have any significant impact on stocks, bonds or the US dollar, Commonwealth Foreign Exchange chief market analyst Omer Esiner said.
Still, the Dow Jones Industrial Average closed at a record high for the first time this year, gaining 0.27 percent at 16,580.84.
The world’s largest economy has been losing steam for some time, with full-year GDP growth slowing to 1.9 percent last year from 2.8 percent in 2012. Growth in the first quarter was the slowest since late 2012.
Driving the first-quarter slump were falling exports and business investment and a larger decrease in inventory investment, the Commerce Department said.
Another key factor was a modest slowdown in consumer spending, which accounts for about two-thirds of US economic activity. Spending fell mainly on nondurable goods, like clothing and food and beverages.
Spending picked up for utilities, with heating bills shooting up during the winter freeze, as well as for healthcare, as people signed up for insurance coverage under US President Barack Obama’s Affordable Care Act health reform.
The report is the first of three estimates on first-quarter growth.
The White House said that the first quarter suffered unusually severe winter weather with record temperatures and snowstorms.
“The president will do everything he can either by acting through executive action or by working with Congress to push for steps that would raise growth and accelerate job creation,” presidential Council of Economic Advisers chairman Jason Furman said.
Esiner said the recent improvements in the US economy should keep the Fed on track to wind down its asset-purchase program near the end of this year. Investors currently expect the Fed to begin lifting borrowing costs around the middle of next year, he said.
“The largely benign Fed announcement today keeps the market’s focus squarely on Friday’s payrolls report for April,” he said.
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