The Federal Reserve’s monetary policy setting committee, the Federal Open Market Committee (FOMC), concluded its April meeting with a statement downgrading its assessment of the economic outlook but offered no indication of any change in policy with respect to the timing of the first increase in interest rates. The committee stuck to its language from the March statement, repeating that “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.”
Despite no “official” change in policy (i.e., the language used to describe it) the downgrade in the economic assessment points to a later start for policy normalization, the first increase in the federal funds rate. While the Fed has been resolutely cagey about the timing of the first increase, stating that June is a realistic option but also stating later than June is realistic, depending on incoming data, the consensus view among analysts has shifted from June to September. And today’s GDP report from the Bureau of Economic Analysis (BEA) may push the start date even further into the future (GDP).
The Fed wants to avoid choking off a fragile economic recovery by raising interest rates too soon, and the weaker than expected economic growth combined with deflation in the first quarter provide more ammunition to committee members willing to wait than those anxious to begin. With payroll gains slowing (jobs), economic growth stumbling and inflation moving in the wrong direction it’s hard to see the Fed gaining confidence sooner rather than later.