Fed downplays weak Q1 economic growth, puts emphasis on labor market strength
The U.S. Federal Reserve kept interest rates unchanged on Wednesday and downplayed weak first-quarter economic growth while emphasizing the strength of the labor market, in a sign it was still on track for two more rate rises this year.
In a bullish statement following the end of a two-day policy meeting, the central bank also said consumer spending continued to be solid, business investment had firmed and inflation has been “running close” to the Fed’s target.
“The committee views the slowing in growth during the first quarter as likely to be transitory,” the Fed said in a unanimous statement.
The labor market continued to strengthen even as growth in economic activity slowed and “the fundamentals underpinning the continued growth of consumption remained solid,” policymakers added.
The Fed raised its benchmark rate by a quarter percentage point at its last meeting in March to a target range of 0.75 percent to 1 percent.
Before this week’s meeting most Fed policymakers had made it clear that in contrast to previous years the central bank feels more confident in its forecast of two more rate increases in 2017.
Wednesday’s affirmation from the Fed that it was optimistic on economic growth and that its rate rise plans remained intact bolstered the dollar against the euro and yen and pushed Treasury yields slightly higher.
“They went out of their way to emphasize this is not something they see persisting and pretty much says to me that their two rate hikes are still on the table for the balance of the year,” said Heidi Learner, chief economist at Savills Studley.
NORMALIZING RATES
The Fed is in its first tightening cycle in more than a decade after it spent years keeping rates near zero to nurse the economy back to health following the 2007-2009 recession.
Policymakers have been buoyed by recent economic data that showed a surge in business investment and the fastest wage growth in a decade. The unemployment rate also fell in March to near a 10-year low.
