Fed's downgrade of economic outlook signals longer rate hike wait

Wed Apr 29, 2015 5:40pm EDT
 
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By Michael Flaherty and Howard Schneider

WASHINGTON (Reuters) - The Federal Reserve downgraded its view of the U.S. labor market and economy on Wednesday in a policy statement that suggested the central bank may have to wait until at least the third quarter to begin raising interest rates.

The Fed's statement put in place a meeting-by-meeting approach on the timing of its first rate hike since June 2006, making such a decision solely dependent on incoming economic data.

The data, however, have been getting worse. Just hours before the Fed's statement, the U.S. government reported that first-quarter gross domestic product came in much weaker than expected.

The central bank acknowledged that growth had slowed in the winter months, a dimmer assessment of the economy than its view in March. And while it said the poor performance was in part due to transitory factors, it pointed to soft patches across the economy, in a sign it may have to hold off hiking rates until at least September.

"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," the Fed said in its statement, following a two-day meeting of its policy-setting committee.

U.S. Treasury yields added to earlier gains and short-term interest-rate futures contracts dropped slightly after the Fed statement before paring the losses. Futures traders continue to bet the Fed will wait until December to raise rates, and give an October rate rise just a 46 percent chance, according to CME FedWatch.

The Fed's guidance on Wednesday differed little from its last meeting. But unlike its March policy statement, this time the central bank did not effectively rule out hiking rates at its next meeting.

That still makes a June move a possibility, though the data would have to sharply improve in the next two months for that to happen.   Continued...

 
The facade of the U.S. Federal Reserve building is reflected on wet marble during the early morning hours in Washington, July 31, 2013. REUTERS/Jonathan Ernst