Fed continues taper despite US economy's first-quarter stall

DPA Washington | Updated on March 13, 2018

The Federal Reserve is continuing to pare back its infusion of cash into the US economy, even after the Government reported on Wednesday that growth screeched to a halt in the first quarter of 2014.

Gross domestic product in the United States grew at an annualised rate of 0.1 per cent in the January-March period, according to an initial estimate by the Commerce Department's Bureau of Economic Analysis.

The slowdown was attributed to the unusually severe winter in the eastern United States and to slowdowns in business investment, exports and inventory growth. Reduced federal defence spending and declines in state and local Government spending were additional factors that held back growth. Consumer spending remained a bright spot in the economy. The figure fell far below most expectations in a Bloomberg survey of 83 economists, whose median forecast had been for growth of 1.2 per cent.

US growth in 2013 was 1.9 per cent, following 2012's 2.8-per-cent expansion. After meeting in Washington, hours after the GDP report, the Fed said it would cut its monthly purchases of Government-linked bonds by another $10 billion to $45 billion in May.

The central bank's rate-setting monetary policy committee continued the so-called taper of its unconventional "quantitative easing," which was worth $85 billion a month last year but has been cut by $10 billion at four regular Fed meetings since December.

Buying up safe-haven Government-linked assets is intended to force investors to put money to work in the private economy and spur growth and hiring.

"There is sufficient underlying strength in the broader economy to support ongoing improvement in labour market conditions," the Fed said.

"In light of the cumulative progress toward maximum employment and the improvement in the outlook for labour market conditions since the inception of the current asset purchase programme, the committee decided to make a further measured reduction in the pace of its asset purchases."

The Fed kept its benchmark interest rate at an unprecedented near-zero, which has been in place more than five years. Economic data in recent weeks "indicates that growth in economic activity has picked up recently, after having slowed sharply during the winter in part because of adverse weather conditions," the Fed said in a statement.

The first quarter estimate marks the second recent stumble for the US economy, which has been in recovery since the end of the severe 2007-09 recession. The fourth quarter of 2012 saw annualised growth of 0.1 per cent.

After that setback, the United States last year delivered growth rates annualised at: 1.1 per cent in the first quarter; 2.5 per cent in the second quarter; and 4.1 per cent in the third quarter. A deceleration to 2.6 per cent in the fourth quarter preceded the January-March number.

"The first quarter of 2014 was marked by unusually severe winter weather, including record cold temperatures and snowstorms, which explains part of the difference in GDP growth relative to previous quarters," Jason Furman, Chairman of President Barack Obama's Council of Economic Advisers, wrote in a White House blog post.

He noted that "several key indicators" were lower in January and February, followed by strong rebounds in March, "suggesting that the severe weather had a disruptive effect that only began to abate at the end of the quarter."

Those included light vehicle sales, average weekly hours, and retailing and restaurant sales. A huge wave of business inventory investment in the second half of 2013 was followed by a drop in the January-March quarter, adding to the weather-related slowdown, Furman said.

Macroeconomic Advisers, a private economic research firm, estimated that weather-related impacts slashed 1.4 percentage points off of economic growth in the first quarter, based on a population-weighted model of snowfall. The firm projects a bounce back that would add 1.6 percentage points to second quarter growth. The Bureau of Economic Analysis is scheduled to issue a second estimate of January-March GDP on May 29.

Published on May 01, 2014

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