Federal Reserve policy makers left open the possibility of raising interest rates in the second half of this year by playing down the significance of the economy's slowdown to a near-standstill in the first quarter.
In a statement issued Wednesday after a two-day meeting, Chair Janet Yellen and her colleagues blamed the winter slump partly on "transitory factors" and reiterated their belief that growth will pick up to a "moderate pace."
"They were straightforward in acknowledging the weakness in the first quarter but avoided suggesting that ruled out interest-rate increases going forward," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.
U.S. stocks, Treasury securities and the dollar slipped as the Fed did little to alter views on the timing for higher rates. The Standard & Poor's 500 Index fell 0.4 percent at 4 p.m. in New York. The Bloomberg Dollar Spot Index dropped 0.5 percent for a sixth day of losses. The yield on 10-year Treasury notes rose four basis points to 2.04 percent, while rates surged on debt from Germany to the Netherlands and Spain.
The Fed repeated it will raise rates when it sees further labor-market improvement and is "reasonably confident" inflation will rise back to its 2 percent goal over time.
The benchmark federal funds rate has been kept near zero since December 2008 as the Federal Open Market Committee battled the worst recession since the Great Depression and then sought to keep the expansion going.
Bad News
A rash of bad economic news so far this year was capped Wednesday by a Commerce Department report that U.S. gross domestic product rose at a 0.2 percent annualized pace in the first three months of 2015. Economists blamed part of the poor performance on harsh winter weather and delays at West Coast ports due to a since-ended labor dispute.
Still, that didn't stop some of them from marking down their projections of growth this quarter. Behind the downgrades: the biggest buildup in inventories since the third quarter of 2010, which companies probably will need to work off by cutting output.
Economists at Bank of America Corp. in New York reduced their second-quarter growth forecast to 2.5 percent from 3.5 percent, while St. Louis-based Macroeconomic Advisers cut its GDP tracking estimate to 2 percent from 2.2 percent.
Convincing Turn
The economy needs to show a convincing turn before Fed officials can be confident that labor markets will continue to improve and inflation will move back toward the central bank's 2 percent goal, said Eric Green, head of economic research at TD Securities in New York.
"Now they have to see affirmation that they are positively right that we are going to get a rebound," Green said.
Even before the release of the first-quarter GDP report, economists had pushed back their forecasts for a rate liftoff by the Fed.
In a Bloomberg survey conducted last week, 73 percent of respondents predicted the central bank will wait until September. In a March poll, a majority predicted the first rate increase in June or July.
In leaving the door open to tighter credit in the second half, the Fed is banking on the economy mimicking its performance in 2014, when it rebounded after a weak start.
Wednesday's statement though suggested that policy makers are less certain of that happening than they were a year ago. Last April, the Fed confidently said that the economy had turned up after slowing sharply during the winter, a characterization it didn't repeat on Wednesday.
Consumer Hopes
Fed policy makers look to be pinning much of their hopes of an economic rebound on a pick-up in consumer spending.
"There were a number of hints that the Committee anticipates a consumption-led firming" of growth, Krishna Guha, a former Fed official who is now vice chairman of Evercore ISI in Washington, said in a note to clients.
They include references in the statement to continued high consumer confidence and to a strong rise in real household incomes thanks to the plunge in gasoline prices.
Consumers have surprised many economists by saving rather than spending much of the windfall they gained from lower gas prices. The savings rate climbed to 5.5 percent in the first quarter, the highest since the end of 2012, from 4.6 percent in the fourth quarter. That signals households have plenty of buying power that could be unleashed in coming months, something Fed officials apparently are hoping will happen.
"They made it pretty clear that they expect things will pick up, and that the labor market will tighten," said Gus Faucher, senior economist at PNC Financial Services Group in Pittsburgh. "If things turn out like we are expecting and like they are expecting, then I think September makes sense" for an interest-rate increase.
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