Noting slow economic growth, Fed keeps interest rate hike on hold

The West Coast port dispute contributed to a slowdown in the U.S. economy in the first quarter. Above, container ships wait outside the ports of Los Angeles and Long Beach in February.

The West Coast port dispute contributed to a slowdown in the U.S. economy in the first quarter. Above, container ships wait outside the ports of Los Angeles and Long Beach in February.

(Bob Chamberlin / Los Angeles Times)

The economy suffered through another case of the wintertime blues this year as growth slowed nearly to a halt, probably delaying a Federal Reserve interest rate hike until September or later.

Total economic output, also known as gross domestic product, expanded at a disappointing 0.2% annual rate in the first quarter, the Commerce Department said Wednesday.

That was down sharply from 2.2% growth in the fourth quarter and well below what analysts expected as bad winter weather, the West Coast port dispute, falling oil prices and the rising dollar took a heavier toll on the economy than originally thought.


The report came on top of recent data, including sluggish March job growth, that once again were dashing hopes for a breakthrough year in the recovery from the Great Recession.

“It is looking, unfortunately, like 2015 is going to be another year where we don’t have the momentum needed to escape the sluggish pace of GDP growth we’ve experienced since the recession,” said Sam Bullard, senior economist at Wells Fargo Securities.

Fed policymakers noted the slowdown in a downbeat statement Wednesday after a meeting in which, as expected, they held the central bank’s benchmark short-term interest rate near zero percent.

They gave no new hints of when they would raise the rate and did not rule out one at the next meeting in June, though most analysts don’t expect a hike until later this year.

“Increasingly, it looks more like a fourth-quarter event,” said Tanweer Akram, vice president and senior economist at Voya Investment Management in Atlanta. With inflation running low and Fed officials waiting to see if the first quarter was an anomaly, “I think policymakers are going to err on the side of caution,” he said.

Investors grappled with the news. The Dow Jones industrial average fell 74.61 points, or 0.4%, to 18,035.53, though it was down more than 100 points in midday trading.

The Fed statement said “transitory factors” were partly the cause of the poor first-quarter performance. And like many economists, central bank policymakers indicated that growth would bounce back this year.

Recent history is on their side. Since 2010, the first full year after the recession, the economy has averaged a 0.6% annual growth rate in the first quarter. Growth in all the other quarters has averaged 2.9%.

“The data is going to improve dramatically over the next few months,” predicted Paul Ashworth, an economist at Capital Economics. Auto and retail sales improved in March in what he sees as a harbinger of rising consumer spending.

“The economy definitely has more underlying momentum to it than the first-quarter figures suggest,” Ashworth said.

Growth in consumer spending, which accounts for about two-thirds of economic activity, fell off steeply. It rose 1.9% in the first quarter, compared with a 4.4% increase in the fourth quarter and its key holiday shopping season.

The economic benefits of falling gasoline prices “have been slow to materialize,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics.

It is “normal for consumers to be slow to spend savings from lower gasoline prices, but historically they do, which will lift growth,” he said.

In the first quarter, consumers appeared to pocket much of the money they saved at the pump. Savings as a percentage of disposable income jumped to 5.5% from 4.6% in the fourth quarter. The latest figure was the highest since 2012.

Consumers remain cautious after the trauma of the recession, said Wayne Best, chief economist at Visa Inc. although gas prices are down about 33% from a year ago, they began rising in February, he said, and that could make people hesitant to spend more.

“If the price at the pump was $2.80 two weeks ago, then $2.85 and $2.90, consumers see that and feel that,” he said.

Business investment fell 3.4% in the first quarter after a 4.7% increase in the previous quarter. Much of the decline was caused by reduced spending on oil rigs and other equipment by energy companies hurting from the large drop in oil prices.

The rising value of the dollar compared to other currencies made U.S. goods and services more expensive abroad, helping trigger a 7.2% decline in exports. Exports had increased 4.5% in the fourth quarter.

“Economic growth in the first quarter was restrained by factors including tepid foreign demand and harsh winter weather,” said Jason Furman, chairman of the White House Council of Economic Advisors. “At the same time, households saved most of their gains from low energy prices.”

The situation was worse in last year’s first quarter. Even more severe snow and cold weather then caused the economy to contract at a 2.1% annual rate. Pent-up demand, however, helped growth bounce back strongly to a 4.8% annual rate over the next six months, the fastest pace since 2003.

Economists don’t expect such a sharp rebound this year.

Wells Fargo’s Bullard had estimated the economy would grow at a 2.7% annual rate in the second quarter but said that forecast probably would be revised down.

Lee Ohanian, a UCLA economist and advisor to the Federal Reserve Bank of Minneapolis, also doesn’t see a big bounce back around the corner.

The Fed and other experts have consistently underestimated the weakness in the recovery, now nearing 6 years old, he said. One of the biggest reasons behind that, Ohanian said, is the sharp slowdown in productivity growth in recent years — something that Fed policies can’t do much to improve.

“They’ve painted themselves into a corner,” he said of Fed policy to hold down interest rates as long as growth is underperforming and inflation remains low.

The so-called federal funds rate has been near zero percent since late 2008 in an attempt to boost economic growth by lowering borrowing costs and making it more enticing to spend than save.

As the recovery from the Great Recession strengthened and job growth accelerated last year, Fed officials signaled that they could start raising the rate as early as June.

But policymakers broadly lowered their assessment of the U.S. economy and labor market Wednesday, reinforcing the view that the central bank’s first interest rate hike in years will come later than previously thought.

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 next two to three years.