Economic activity sputtered in the first quarter, job growth stumbled in March, and inflation turned negative at both the headline and core (excluding food and energy) levels. Policymakers on the Federal Open Market Committee (FOMC) “decided to maintain the target range for the federal funds rate at 3/4 to 1 percent” and pronounced “Near-term risks to the economic outlook appear roughly balanced.”
The pause in May after the increase in March reflects more pragmatism than new concerns about the outlook. A recurring theme in the committee’s communication (second only to “gradual increases in the federal funds rate”) is that one bad month shouldn’t overly influence expectations for the near-term. And the data certainly qualifies March as a bad month. But the seeds for a quick rebound are already in the ground. An April rebound in payroll growth can be expected if unusually warm weather accelerated hiring in January and February at the expense of March (jobs). And the warm weather also reduced consumer spending on utilities in the first quarter, which combined with a short list of other one-off factors that depressed GDP growth (gdp). Similarly, inflation reflected the double whammy of recent swings in energy prices and a steep decline in wireless telephone services (cpi).
All of these factors can be dismissed as transitory and the FOMC’s exercise in accentuating the positive can be justified in light of the progress to date and the underlying trends in job growth, the unemployment rate, wage and income gains, household spending and inflation. A long awaited uptick in business fixed investment is another reason to turn a blind eye toward the weak March numbers.
The post-meeting statement may have an unusually “reaching” tone but the message is clear: the economic fundamentals are solid and monetary policy normalization is moving forward at a gradual pace.