April 30, 2015 Reading Time: 2 minutes

It is no surprise that no action was taken at the April Federal Open Market Committee meeting since the central bank has firmly formed public expectation of no interest rate increase in April. The question of interest to the market is whether the Federal Reserve has revealed some clear signal in its statement about the timing of the future rate increase. Disappointingly (but not surprisingly), the Fed didn’t change its forward guidance on rate increases from the March statement.

Even though we didn’t get as clear guidance as we would like to, we can discern what the Fed has on its plate. Four aspects of the economy stand out:

  • The latest GDP data show worse-than-expected growth at an annualized 0.2 percent during the first quarter of 2015, compared to 2.2 percent in the last quarter of 2014.
  • The strong U.S. dollar has continued to weigh on exports. Net exports in the first quarter stayed unchanged (0.0 percent growth) year-over-year, compared with 18.6 percent growth in the fourth quarter of 2014. 
  • Inflation has continued to stay way below the central bank’s 2percent target. The price index for personal consumption expenditure (PCE), the measure of inflation preferred by the Fed, showed a 0.3 percent year-over-year increase in the first quarter, much lower than the growth rate of 1.1 percent in the fourth quarter of last year. Core PCE inflation, which excludes volatile prices of food and energy, reached 1.3 percent, compared with 1.4 percent in the last quarter.
  • The improvements in the labor market, the other mandate of the Federal Reserve besides inflation, also slowed. Only 126,000 employees were added to nonfarm payrolls in March, compared to 264,000 in February and 201,000 in January.

All in all, the U.S. economy is growing more slowly than anticipated with some headwinds that may last for a while, such as the strong dollar. Both measures of the Fed’s dual mandate, price stability and maximum employment, remain below the Fed’s target. Normally this would call for an accommodative monetary policy, postponing the rate increases until later in the year. Rather than starting rate increases at the June FOMC meeting, the liftoff in September instead is more likely.

Jia Liu, PhD

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