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Business

Fed gives no timeframe for interest rate hike

Pointing to a sharp slowdown in economic growth and weakness in labor market, the Federal Reserve has downgraded its assessment of the US economy and offered no sign that a rate increase might be coming soon.

On a day when the US government said the economy barely grew in the January-March quarter, the central bank appeared no closer to raising its benchmark interest rate from a record low near zero. The Fed noted in a statement that growth slowed, business investment softened and exports declined in the first quarter.

The Fed's policy statement puts it on track to begin a meeting-by-meeting approach toward deciding when to pull the trigger on its first rate hike since June 2006. The central bank, however, acknowledged soft patches across the economy, making it more likely that it will not be ready to hike rates until at least September.

"The committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term," the Fed said in its statement, following a two-day meeting of its policy-setting committee.

The Fed's rate guidance mirrored what it gave last month. But unlike its March policy statement, this time the central bank did not effectively rule out hiking rates at its next meeting. While that makes a June move possible, the economic data is not cooperating.

Weak growth

Harsh weather, plunging exports caused by a strong dollar, and sharp cutbacks in investment and government spending weighed on the US economy in the first quarter, causing GDP to expand by a meager 0.2 percent.

Plummeting exports linked to a strong rise in the dollar pulled growth down by nearly a full percentage point. At the same time, investments in oil and gas exploration drilling plunged 48.7 percent. Consumer spending also slowed sharply as a severe winter kept shoppers home.

A now-resolved labor dispute at normally busy West Coast ports also slammed growth, the government said.

The first-quarter GDP growth number was much smaller than economists had expected, but analysts are still looking for a solid rebound for the rest of the year.

However, data on home building, manufacturing, retail sales and business investment suggest the rebound will lack the vigor seen last year, when the world's largest economy picked up momentum after being blindsided by cold weather.

Furthermore, US employers added just 126,000 workers last month, the fewest since December 2013, breaking a 12-month streak of gains above 200,000.

The dollar's strength is expected to remain an economic headwind in the quarters ahead. The stronger dollar has hurt American manufacturers by making their goods costlier overseas. It has also made foreign imports more competitive in the United States, thereby squeezing the sales of US companies and depressing profits.

Lower import prices have helped hold US inflation below the Fed's long-run target of 2 percent rate.

Rate hike soon?

Still, economists expect the benefits of lower energy prices to boost consumer spending - and lift economic growth - over the rest of the year. Some see September as the more likely time for a rate hike, while many investors see an even later time horizon, with futures contracts pointing more toward December.

The central bank will have at least two months of economic data to consider before its next policy-setting meeting in June, when it also issues new economic projections.

Once the Fed does start raising rates, it's expected to do so very gradually. And the timetable for a rate hike could be delayed if growth doesn't pick up or if some crisis should erupt.

sri/nz (Reuters, AP, AFP)