Fed Sees U.S. Economy Accelerating After Slump in First Quarter

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Fed Not Ruling Out Rate Increase in June

Federal Reserve policy makers said they expect the economy to pick up after growth ground to a virtual halt in the first quarter, suggesting they are still open to an interest-rate increase later in the year.

The Federal Open Market Committee “continues to expect that, with appropriate policy accommodation, economic activity will expand at a moderate pace,” the panel said in a statement Wednesday in Washington. The slowdown partly reflected “transitory factors,” it said.

By repeating its view that growth will rebound up to a “moderate pace,” the committee put financial markets on notice that the first rate increase since 2006 is still in play.

“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 increase.

The Fed repeated it will raise rates when it sees further labor-market improvement and is “reasonably confident” inflation will move back to its 2 percent goal over time.

The benchmark federal funds rate has been kept near zero since December 2008 as the Fed battled the worst recession since the Great Depression and then sought to keep the expansion going.

Stocks and Treasuries remained lower after the statement. The Standard & Poor’s 500 Index was down 0.3 percent to 2,107.75 as of 3:26 p.m. Ten-year Treasury notes yielded 2.05 percent, up five basis points from Tuesday.

Growth Slump

The economy grew at a 0.2 percent annual rate last quarter after advancing 2.2 percent in the prior three months, Commerce Department data showed earlier Wednesday, choked by a slump in U.S. business investment and exports. Economists surveyed by Bloomberg forecast a 1 percent gain.

Even before the release of the first quarter GDP report, economists had pushed back their forecasts for liftoff after a run of disappointing economic data.

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.

Employers added 126,000 workers to payrolls in March, the weakest month since December 2013. Reports on manufacturing and retail sales have also trailed behind economists’ expectations.

“The pace of job gains moderated,” the Fed said, and “underutilization of labor resources was little changed.”

Unemployment Forecast

While unemployment has fallen to 5.5 percent from a post-recession peak of 10 percent, Fed officials have reduced their estimate of the long-run jobless rate to 5 percent to 5.2 percent, suggesting they have room to keep borrowing costs low to put more Americans back to work.

The Fed also said that while inflation is likely “to remain near its recent low level in the near term,” policy makers expect it “to rise gradually toward 2 percent over the medium term.”

Inflation has lingered below the Fed’s goal for 34 straight months. The Fed’s preferred gauge of prices rose just 0.3 percent in February from a year earlier.

Lower oil prices have helped keep a lid on inflation while also sapping energy-related investment, and a stronger dollar has curbed exports and made imports cheaper.

Pfizer Inc., the biggest U.S. drugmaker by sales, cut its 2015 earnings forecast because of the impact of the dollar on overseas sales.

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