June Is Out, September Looking Less Likely

June is pretty much out and September is starting to look less and less likely. In fact, the possibility is increasing that the Federal Reserve will hold off until 2016 for their long-awaited interest rate hike.

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The statement released Wednesday by the policy-setting Federal Open Markets Committee only strengthened the notion that central bankers remain in no hurry to raise rates.

Most of the first quarter data was weak, the Fed acknowledged, but the economy continues to grow at “a moderate pace” and the timing of a rate hike continues to depend on “incoming data.”

Not much new here.

“If we were looking in the statement for where the needle may have moved on interest rates, we didn’t get any closer to a rate hike,” said Carl Tannenbaum, chief economist at Northern Trust and a former analyst at the Chicago Fed.

Wednesday’s statement was “noticeably more downbeat” than the Fed’s March statement, Tannenbaum noted, citing shifts in language used to describe such important economic indicators as job gains and household spending, both of which weakened between the Fed’s March and April meetings.

Fed Conceding What Everyone Knew

But the Fed was only conceding what everyone else has been saying for months, and what the GDP report released Wednesday morning confirmed: the economy ground almost to a halt during the first quarter.

“This is an acknowledgement of what we learned this morning with the first quarter GDP report,” agreed Tannenbaum.

GDP slowed to 0.2% during the first three months of the year, down from 2.1% in the fourth quarter. The government cited another unusually harsh winter, as well as other factors including a port strike in California, a rapid decline in the price of oil and an escalation in the value of the dollar for the weak quarter.

The lousy GDP report came on the heels of a shockingly bad March jobs report, which revealed job creation was far worse than anticipated last month. The next jobs report is due Friday May 7.

Still, just about everyone believes the downturn was seasonal and temporary and that the economy will pick up steam again in the second quarter.

“I think the challenge for the Fed and for the rest of us is to determine how significant some of these transitory factors are,” said Tannenbaum.

The weather is improving and the port strike is over. But energy costs are always volatile and the strength of the dollar is hard to predict on a long-term basis.

What all of this means is that the Janet Yellen-led Fed is likely to remain cautious in terms of returning monetary policy to normal following more than six years of rock bottom interest rates and interventionist policies introduced in the wake of the 2008 financial crisis.

Fed Wants to Maintain Flexibility

That means central bankers are very likely to put off any decision on rate hikes until an array of second-quarter data starts rolling in and that data confirms the predictions that the first quarter was a fluke and that the recovery is still moving forward.

What the Fed really wants to maintain is the flexibility to raise rates when they are absolutely certain the higher borrowing costs that will follow a rate hike won’t completely derail the recovery. Thus all the redundant, wishy-washy language.

Analysts at IHS Global Insight summed up the statement: “The Fed isn’t being naïve. Policy makers fully understand that while much of the first quarter slowdown was weather-related, economic growth and inflation still face ongoing headwinds from the strong US dollar, low oil prices, overseas growth risks, and continued household deleveraging. So the Fed has decided to maintain as much flexibility as possible by avoiding committing to any particular timing and pace of rate hikes.”

Don’t expect that ambiguity to end until the economic data is so relentlessly sunny it’s blinding. That hasn’t happened yet. Far from it.

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