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Growth Outlook Despite Uncertainty

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Old 04-13-2014, 04:31 PM   #1
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Invoice Growth Outlook Despite Uncertainty

The minutes from the latest Federal Reserve Open Market Committee (FOMC) meeting in March were released yesterday evening (BST). The minutes revealed that the staff marginally revised down their outlook for economic activity in the range of forecasts prepared for the meeting.

While their December projection for US growth in 2014 ranged between 2.8% and 3.2%, the latest minutes suggest a slight drop in optimism amongst monetary policymakers. The economy is now expected to expand by between 2.8% and 3.0%. Some weaker-than-anticipated economic indicators since January were attributed in part to adverse weather conditions, with the slowdown being deemed significant enough to warrant a slight fall in growth expectations.

The FOMC also predicts that the unemployment rate will remaining elevated compared with pre-financial crisis levels, with the rate falling to only 6.3% by the end of the year - it currently stands at 6.7%.

The low participation rate (63.2% according to the latest data) was a particularly divisive issue among the board members; while most agreed that slack remained in the market, there was disagreement over how much. Opinion among the committee participants was broadly divided between those that felt cyclical factors were working to under-represent unemployment, and those that believed that the labour market had permanently tightened due to demographic trends - such as a first wave of retirement among baby-boomers. The condition of the labour market in this regard is particularly important, as greater slack would mean that as the economy heats up a larger number of people will re-enter the labour force.

The decision was also made by the Committee to move away from the 6.5% unemployment threshold used in the ongoing forward guidance for the Federal Funds Rate. In the March 18-19 meeting most of the Committee opted to replace the unemployment threshold with a new qualitative description of factors. This decision was due to the Committee's suspicion that the unemployment rate will fall below the prescribed 6.5% threshold much sooner than anticipated.

The minutes reveal the issue of determining a workable and trustworthy interest rate policy was of chief concern to the board members, however it appears that investors have been appeased for now - with shares generally rising after the minutes were released. Overall, Cebr expects US economic performance to be solid this year and next, with the economy growing by 2.8% and 3.1% in 2014 and 2015 respectively.
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