The Federal Reserve lowered its economic outlook Wednesday but forecast improved growth in the months ahead, leaving open a possibility of an interest rate hike as soon as its June meeting.
In a statement after a two-day meeting, the Fed gave no clear signal of when it plans to raise its benchmark interest rate for the first time since 2006 but policymakers have indicated they expect to act this year.
The Fed said economic growth "slowed during the winter months, in part reflecting transitory factors." Unusually cold weather, for example, chilled economic activity. The Fed said it expects the economy to rebound and grow at a moderate pace in coming months.
Some economists have said that if Fed policymakers blamed the economy's recent sluggishness on short-lived factors, such as the cold weather, a June rate increase would still be at least a possibility. Such a move, however, would require a dramatic upswing in growth.
The Fed's statement noted that job growth "moderated" and household spending declined in recent weeks, though inflation-adjusted incomes "rose strongly, partly reflecting earlier declines in energy prices."
Business investment, however, "softened" and exports declined, the statement said. The Fed added that inflation continued to run below the Fed's target, "partly reflecting earlier declines in energy prices and decreasing prices of non-energy imports." Fed policymakers said they expect inflation "to rise gradually toward 2% over the medium-term as the labor market improves further and the transitory effects" of low energy and import prices dissipate.
The government said Wednesday morning that the economy grew just 0.2% at an annual rate in the first quarter, down from 2.2% in the October-December period and below the modest 1% pace expected by economists.
Meanwhile, inflation remains well below the Fed's annual 2% target, with the government reporting that the Fed's preferred measure, which excludes food and energy costs, rose 0.9% last quarter. That's the smallest increase since 2010.
And employers added just 126,000 jobs in March, compared to average monthly gains of 269,000 the prior 12 months.
The Fed reiterated Wednesday that it will bump up its federal funds rate "when it has seen further improvement in the labor market and is reasonably confident that inflation will move back" to the Fed's 2% target "over the medium-term."
The central bank has kept its benchmark interest rate near zero since the 2008 financial crisis, but with the economic recovery now almost six years old, the central bank has been preparing financial markets and consumers for a return to normal interest rate policy. Last month, the Fed dropped a pledge to be patient as it considers boosting the rate, signaling that it could make the move as early as June.
Many economists say the Fed is unlikely to act until September at the earliest so it can assess whether the economy is regaining the momentum it had built last year. That timetable is consistent with Fed policymakers' median forecast in March as well as with recent speeches by Fed policymakers, including Fed Chair Janet Yellen .
Fed officials have advocated caution as the economy continues to battle headwinds from the recession, such as wary lenders and a large pool of discouraged workers who have stopped looking for jobs.
Further clouding the picture in recent months was unusually cold weather that kept many shoppers at home and a now-settled labor dispute at West Coast ports that hampered shipments to and from factories. The impact of those events is already fading.
Other forces, though, could persist several months. A strong dollar is making U.S. manufacturers' exports less competitive abroad, while oil companies have slashed investment in response to lower crude prices.
Many economists predict that low gasoline prices and faster wage gains – a byproduct of the near-normal 5.5% unemployment rate -- will spur increased consumer spending, powering the economy to a solid 3% expansion this year.
Ty Laffoon sent this from USA Today
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