Fed gives cautious reading on economy, holds main interest rate near zero

Fed officials give a more downbeat view of the economy

The Federal Reserve on Wednesday broadly lowered its assessment of the U.S. economy and labor market, reinforcing the view that the central bank's first interest-rate hike in years will come later than previously thought.

The Fed, in its statement after a two-day meeting in Washington, attributed the recent loss of economic momentum partly to temporary factors such as the winter weather. But officials also noted a slowdown in job gains and business investment, as well as an outright decline in exports, reflecting the strong dollar.

Earlier Wednesday, the Commerce Department reported that the economy barely grew in the first three months of the year after expanding at a moderate 2.2% pace in the fourth quarter. Analysts reckon the cold winter played a big role, as it did last year, but other factors such as those cited by the Fed could prove more lasting and make it more difficult for the economy to bounce up sharply in the spring and summer, as it did last year.

Still, most analysts expect growth to pick up in the coming months, as does the Fed. On the bright side, its statement noted that household incomes had received a boost from a decline in energy prices, and that consumer sentiment -- an important factor in spending decisions -- remains high, although that hasn't translated into a lot more buying activity yet.

Policymakers did not rule out the possibility of a rate hike at their next meeting in June. The statement, approved unanimously, reiterated that the central bank would raise its benchmark short-term rate "when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term."

The Fed's main interest rate, which has a broad influence on borrowing costs for businesses and consumers, has been held near zero since December 2008. The last time the rate was raised was in 2006.

Early this year, a number of analysts had predicted a Fed rate hike in June, but as more economic data have come in showing weaker activity, forecasters have moved the timing of such a move to later in the year, to September or even December. 

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