The Federal Reserve seems to be soon stating the fact that the slightly economic growth that took place in the first quarter is a temporary phenomenon and will not inhibit its plans to raise interest rates.
Moreover, the Fed has estimated two more interest rates increases for the current year. In regard to this matter, the market believes that changes are greater than 50% that the next increase will take place in June.
As an excuse for the modest growth of only 0.7% in the first quarter, economists have emphasized the warm weather early in the period that was followed by snow storms in March.
Even so, economists are expecting a bounce back of the economy in the second quarter with a forecasting even better than 3% growth. On the other hand, inflation is another key indicator that has let economists down. Moreover, it is strongly believed that the Fed should be saying something about this matter.
The Fed’s comments on this subject are closely watched by Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management:
“If they come out overly concerned about the down tick in core PCE then we’re going to scratch our heads pretty hard. That would be a surprise, so I think the thing to look for is if they fixate too much on the inflation number. Everything else says hike. If they fixate too much on the inflation number, it’s going to cause a lot of question marks,” he said.
In addition to this, the first quarter also encountered a decrease in consumer spending. Even though it was seen as something temporary, a collapse in April auto sales brought even more concerns. However, even though consumers were not as aggressive as predicted, economists don’t forecast a bigger problem.
The Fed officials have pointed out that they could announce a plan for the reduction of the balance sheet, later this year. The $4.5 trillion balance sheet increased as securities were bought in order to fight the financial crisis and the dull growth that followed. One way to do so is by simply putting an end to the monthly purchases in order to replace the securities that mature.