The Federal Reserve insisted that the US economy is strong enough to withstand a cut to its stimulus program, despite being forced once again to cut its growth forecasts.
In its updated economic forecast on Wednesday, the Federal Reserve's picture of the US economy remained chipper, even as consumers find their wallets emptier and analysts widely agreed that "the facts are now different" about the prospects for US economic growth.
“Information received since …April indicates that growth in economic activity has rebounded in recent months,” the Federal Reserve said in a statement on Wednesday.
“The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually.”
The Fed statement was nearly an exact copy of its last statement, despite the expectations of economists that the central bank would recognize recent weaknesses in unemployment and GDP.
On inflation, the Fed said it is "monitoring inflation developments carefully", but did not commit to any action. It cut its bond purchases by $10bn a month, in a continuing effort to exit its quantitative easing program.
The upbeat tone of the Fed is strongly at odds with the view of many economists that measures of the economy have grown more troubling since April. Specifically, gross domestic product has fallen into negative territory, indicating that the economy shrank, and unemployment remains high.
The Fed's chairman, Janet Yellen, struck a largely optimistic note in her press conference, saying there are reasons "why we should see sustained growth above the economy's potential," including rising home prices and an improving global economy.
That may be some time in the future, however, as she conceded early on that "the potential growth of the economy may be lower for some time."
Yellen also indicated she is unconcerned about inflation, in answer to a question about whether the Fed is taking an overly rosy view and "behind the curve" on inflation.
"The data we're seeing is noisy … inflation is rising in line with committee's expectations," Yellen said. Yellen also suggested that interest rates would stay low "for a considerable period" after the Fed's bond-buying program ends.
Economists had widely expected the Fed to revise its GDP expectations downward along with its expectations for the unemployment rate.
As Lindsey Group analyst Peter Boockvar wrote to clients before Wednesday's meeting: "[The Federal Reserve’s] credibility is on the line if they ignore that the facts are now different." The worsening of the economy has been evident to many Americans.
Unemployment statistics show that only 62% of people are working, and houses prices have stayed high while mortgage lending is unavailable to most people. The biggest concern at the moment is inflation, which is punishing families.
The prices that consumers are paying for day-to-day food and gas are rising. The inflation index for food prices is at its highest point in nearly three years. Meat prices, for instance, are up 7.7% and dairy prices are up 4.2%, according to Keefe Bruyette & Woods.
The pressure of paying more at the supermarket combines with rising household debt and falling wages to mean that households are being squeezed between paying off their debt and shelling out rising prices for necessities – all while their incomes remain stagnant.
"May was not a good month for consumers’ wallets," said Michael Montgomery of IHS Global Insight. “The energy portion of consumers’ budgets was stretched by higher gasoline and electricity bills. It was no joy to go to the food store either.”
Montgomery added: “The twin gains in food and gasoline are particularly disquieting to consumers as those are the two most often seen prices, and therefore the ones which affect moods the most … This is not the stuff of hyper- or even double-digit inflation, but it is draining and seemingly just one thing after another.”
For the past several years, the Federal Reserve has issued positive forecasts for US growth, expecting a recovery. Yet many consumers have been feeling the pinch in a way that the central bank has not anticipated.
Unemployment has remained high, housing weak, inflation rising and growth slow. The Fed’s expectations for GDP - which measures the overall productivity of the economy - have already proven incorrect.
Policymakers expected 2.8% to 3% growth, while the most recent reading was -1% if considered over a year. The Fed most recently expected the unemployment rate to fall to the range of 6.1 to 6.3% by the end of the year. It's already there, as Boockvar notes, with two straight months of 6.3% unemployment.
The labor force participation rate, which measures how many working-age adults actually have jobs, is 62.8% - one of the lowest percentages in 30 years. The housing market has been struggling more than the Fed expected, with expert Robert Shiller calling the trends "worrisome."
"The spring home selling season has been mixed at best as investors have slowed down their purchase pace and the first time potential home buyer has been more inclined to rent," Boockvar wrote.
Another thorny problem facing the Federal Reserve has been interest rates, which Wall Street wants to rise after several years at zero. Worsening economic conditions are likely to keep rates low, economists say.
theguardian.com
In its updated economic forecast on Wednesday, the Federal Reserve's picture of the US economy remained chipper, even as consumers find their wallets emptier and analysts widely agreed that "the facts are now different" about the prospects for US economic growth.
“Information received since …April indicates that growth in economic activity has rebounded in recent months,” the Federal Reserve said in a statement on Wednesday.
“The committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually.”
The Fed statement was nearly an exact copy of its last statement, despite the expectations of economists that the central bank would recognize recent weaknesses in unemployment and GDP.
On inflation, the Fed said it is "monitoring inflation developments carefully", but did not commit to any action. It cut its bond purchases by $10bn a month, in a continuing effort to exit its quantitative easing program.
The upbeat tone of the Fed is strongly at odds with the view of many economists that measures of the economy have grown more troubling since April. Specifically, gross domestic product has fallen into negative territory, indicating that the economy shrank, and unemployment remains high.
The Fed's chairman, Janet Yellen, struck a largely optimistic note in her press conference, saying there are reasons "why we should see sustained growth above the economy's potential," including rising home prices and an improving global economy.
That may be some time in the future, however, as she conceded early on that "the potential growth of the economy may be lower for some time."
Yellen also indicated she is unconcerned about inflation, in answer to a question about whether the Fed is taking an overly rosy view and "behind the curve" on inflation.
"The data we're seeing is noisy … inflation is rising in line with committee's expectations," Yellen said. Yellen also suggested that interest rates would stay low "for a considerable period" after the Fed's bond-buying program ends.
Economists had widely expected the Fed to revise its GDP expectations downward along with its expectations for the unemployment rate.
As Lindsey Group analyst Peter Boockvar wrote to clients before Wednesday's meeting: "[The Federal Reserve’s] credibility is on the line if they ignore that the facts are now different." The worsening of the economy has been evident to many Americans.
Unemployment statistics show that only 62% of people are working, and houses prices have stayed high while mortgage lending is unavailable to most people. The biggest concern at the moment is inflation, which is punishing families.
The prices that consumers are paying for day-to-day food and gas are rising. The inflation index for food prices is at its highest point in nearly three years. Meat prices, for instance, are up 7.7% and dairy prices are up 4.2%, according to Keefe Bruyette & Woods.
The pressure of paying more at the supermarket combines with rising household debt and falling wages to mean that households are being squeezed between paying off their debt and shelling out rising prices for necessities – all while their incomes remain stagnant.
"May was not a good month for consumers’ wallets," said Michael Montgomery of IHS Global Insight. “The energy portion of consumers’ budgets was stretched by higher gasoline and electricity bills. It was no joy to go to the food store either.”
Montgomery added: “The twin gains in food and gasoline are particularly disquieting to consumers as those are the two most often seen prices, and therefore the ones which affect moods the most … This is not the stuff of hyper- or even double-digit inflation, but it is draining and seemingly just one thing after another.”
For the past several years, the Federal Reserve has issued positive forecasts for US growth, expecting a recovery. Yet many consumers have been feeling the pinch in a way that the central bank has not anticipated.
Unemployment has remained high, housing weak, inflation rising and growth slow. The Fed’s expectations for GDP - which measures the overall productivity of the economy - have already proven incorrect.
Policymakers expected 2.8% to 3% growth, while the most recent reading was -1% if considered over a year. The Fed most recently expected the unemployment rate to fall to the range of 6.1 to 6.3% by the end of the year. It's already there, as Boockvar notes, with two straight months of 6.3% unemployment.
The labor force participation rate, which measures how many working-age adults actually have jobs, is 62.8% - one of the lowest percentages in 30 years. The housing market has been struggling more than the Fed expected, with expert Robert Shiller calling the trends "worrisome."
"The spring home selling season has been mixed at best as investors have slowed down their purchase pace and the first time potential home buyer has been more inclined to rent," Boockvar wrote.
Another thorny problem facing the Federal Reserve has been interest rates, which Wall Street wants to rise after several years at zero. Worsening economic conditions are likely to keep rates low, economists say.
theguardian.com
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