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In this July 29, 2014 photo, jeweller Murray Cadenhead works on repairing a piece of jewellery at Perry's Fine Jewelers on Independence Boulevard in Wilmington, N.C. (Mike Spencer/AP)
In this July 29, 2014 photo, jeweller Murray Cadenhead works on repairing a piece of jewellery at Perry's Fine Jewelers on Independence Boulevard in Wilmington, N.C. (Mike Spencer/AP)

Fed stays the course on rates as U.S. gathers speed Add to ...

America’s economy surged back to life in the spring, accelerating out of its first-quarter slump at one of the fastest rates of growth since the end of the Great Recession.

The better-than-expected annualized growth rate of 4 per cent in the second quarter caused some analysts to wonder whether the Federal Reserve will advance its timetable for raising its benchmark interest rate from zero.

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For now, the answer to that question is, “No,” as the Fed’s policy committee followed the release of the latest estimate of gross domestic product Wednesday with a statement that said that central bank intends to stick to its present course.

“A range of labour market indicators suggests that there remains significant under-utilization of labour resources,” the Federal Open Market Committee said at the end of the two-day meeting in Washington.

Fed officials did acknowledge that “economic activity rebounded” in the second quarter. The report by the Commerce Department showed the revival was broad, as household consumption, business investment, exports and government spending all posted gains. Personal consumption of durable goods increased at the fastest pace since 2009.

It’s an early reading, so investors could be wary in their interpretation of the first of three estimates. Still, the positive surprise should buoy sentiment that the U.S. recovery is back on a steady track after an unusually harsh winter caused GDP to contract in the first three months of the year.

The U.S. dollar rose after the report was released Wednesday morning, an indication that investors are confident the world’s largest economy is getting stronger and interest rates will rise sooner rather than later.

The data, “will provide additional fodder for those claiming the Fed is very much behind the curve, a claim we agree with,” said Adrian Miller, director of fixed income strategy at GMP Securities in New York.

Mr. Miller added in a note to his clients that he believes the Fed has an “institutional bias” toward erring on the side of faster growth because it would rather react to hotter inflation than be accused of harming economic growth unnecessarily.

Wall Street was surprised by the GDP number, as the consensus forecast was a full percentage point lower than the reported result. The Commerce Department also revised its estimate for the first quarter to show a contraction of 2.1 per cent, less severe than its previous calculation of 2.9 per cent. The change suggests the unusually harsh winter left the U.S. economy in a shallower hole than previously thought, causing some economists to upgrade their outlooks for 2014.

Fed chair Janet Yellen has made clear in recent weeks that the core of the central bank’s leadership believes it will be necessary to leave the benchmark rate at zero well into next year to guard against unexpected economic shocks. The U.S. unemployment rate is falling quickly, but still is about a percentage point higher than what Fed officials would like. Measures such as longer-term unemployment and the labour-force participation rate also remain elevated.

As expected, the Fed shaved its monthly purchases of Treasuries and mortgage-backed securities to $25-billion (U.S.) from $35-billion and gave every indication that it will end the extraordinary stimulus program on schedule at the end of October.

Still, one member of the committee voiced concern that the Fed is too lax on inflation. Philadelphia Fed president Charles Plosser voted against the policy statement, saying the cautious tone “does not reflect the considerable economic progress that has been made toward the committee’s goals.”

The GDP report’s measure of inflation accelerated to 1.9 per cent, close to the Fed’s target of 2 per cent. On Wednesday, back-office service provider ADP’s latest analysis of its payrolls data showed private employers added 218,000 jobs in July, weaker than June’s gain of 281,000, but still indicative of an economy that is adding jobs at a pace fast enough to lower the unemployment rate.

The fact that more people are working showed up in the second-quarter GDP numbers. Personal consumption expenditures gained 2.5 per cent in the second quarter, compared with a 1.2-per-cent increase in the first quarter. Americans increased the amount of money they spent on automobiles, televisions and other durable goods by 14 per cent, compared with a 3.2-per-cent gain in the first quarter.

“It’s really consumer confidence,” Bob Wheeler, chief executive of Airstream, the maker of high-end camping trailers, said in an interview earlier this month.

“It seems more fragile now than it was 10 years ago. A few bad days in the news cycle and we tend to see the results at the dealerships’ lots,” he said. “The upside is people don’t give up on those aspirations, so when the news cycle turns the other way and consumer confidence picks up, people tend to come back and come back strongly.”

Follow on Twitter: @CarmichaelKevin

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