Janet Yellen is looking past this winter’s economic stall and setting the stage for an economy that looks like it is about to launch a spring revival.
The U.S. Federal Reserve chief and her central bank colleagues pointed Wednesday to a better job market and strong consumer spending as evidence that the world’s largest economy is gathering momentum.
The relatively upbeat economic assessment from the Fed helped send the Dow to its first record-high close of the year, ending up 45.47 points or 0.27 per cent at 16,580.84.
As expected, the Fed announced it is continuing a steady withdrawal of the massive amounts of emergency stimulus it has been pumping into the economy. It will cut its monthly purchases of Treasury bills and mortgage-backed securities by another $10-billion (U.S.), trimming or “tapering” the bank’s quantitative easing efforts to $45-billion a month.
“The future pace of bond-buying is not on a preset course,” remarked Toronto-Dominion Bank senior economist Michael Dolega. “But at this point it is hard to imagine how bad the economic data on the Fed’s dashboard would have to get for the [Fed policy-making committee] to alter the course of tapering.”
Ms. Yellen offered no new clues as to when, and under what conditions, the Fed will end more than five years of ultra-low interest rates.
The committee’s nine members voted unanimously to preserve some ambiguity about when the bank will start raising its trend-setting federal funds rate, slashed to near-zero in December, 2008.
Ms. Yellen’s rosier assessment of the economy came as the U.S. Department of Commerce reported Wednesday that the economy stalled in the first quarter, growing at a minuscule 0.1-per-cent annual rate.
Growth was sharply weaker than the 1.2-per-cent consensus expected by economists, due in part to winter storms and bitter cold.
The unexpectedly weak quarter is likely more of an aberration than a sign that the U.S. recovery has fallen off the rails – an assessment endorsed by the Fed.
“Growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather,” the bank’s interest-rate-setting Federal Open Market Committee said in a statement following a two-day meeting.
Bank of Nova Scotia economists Derek Holt and Dov Zigler said the Fed seems to have dismissed the preliminary gross domestic product report as little more than “a weather report.”
For starters, the GDP estimate is preliminary, and winter is now over. More recent data, particularly on trade, suggest GDP for the quarter will ultimately be revised up. Economists expect much stronger growth in April and the rest of the year.
The second bit of good news contained in the report is that consumption grew a healthy 3 per cent annually in the first three months of the year. Consumers make up more than three-quarters of the U.S. economy.
The weakness in the quarter was concentrated in exports (down 7.6 per cent), investment in equipment (off 5.5 per cent), housing (down 5.7 per cent) and inventories.
The export slump was due in large part to an earlier Chinese New Year, which caused many exporters to ship late last year instead of early in 2014. Wells Fargo Securities economist Mark Vitner said recent data showing higher March shipments from West Coast U.S. ports will likely trigger large revisions by the Commerce Department.
The big question mark is whether the U.S., like Canada, will bump along at growth of roughly 2.5 per cent a year or start to gather steam. The Bank of Canada, for example, projects U.S. growth of 2.8 per cent this year, 3.2 per cent in 2015 and 3 per cent in 2016.
One area of concern for the Fed is the housing market. After rebounding strongly last year, several key measures have slowed this year, including housing starts, sales and new mortgage applications.
And that’s reason enough for Ms. Yellen not to start committing to higher rates just yet. The Fed’s next meeting is set for June 17-18.