Fed Grows Concerned Over US Prospects

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Fed Grows Concerned Over US Prospects
Fed Grows Concerned Over US Prospects

Fed Grows Concerned Over US Prospects

The US recovery is at a critical juncture. This month’s annualized GDP forecast has undergone a pronounced revision downwards to just 2.5%. Contrast this to last month’s actual figure of 3.2% and the previous month’s 4.1% and you would be forgiven for growing concerned.

The main worry here is not the actual figure. Global economies are currently in the early stages of a return to growth, and in this environment a GDP growth rate of 2.5% is nothing to be ashamed of. The real concern here is the trend. 2.5% is within striking distance of the normal, stable, long-term growth rate of 3.0% recommended by economists. However should growth continue on it’s present trajectory over the coming month’s and the US will have a real problem on it’s hands.

This revision downwards shouldn’t come as a surprise. The US has been missing target on key data releases since the start of the year, this propensity to miss target has been noticeably accelerating over the last few weeks. Initial reaction was to blame the severity of the weather during the winter season, it is however now looking like the cause of the slowdown is more structural.

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Janet Yellen as Chair of the Federal Reserve, testified in front of the US Senate yesterday. Even Yellen initially appeared to blame the weather conditions for the weak data. However she went on to qualify her statement to note that the Fed was currently parsing the last two months data in order to establish how much of the weakness is structural as opposed to weather related. Ironically Yellen’s testimony to the Senate was delayed by an unexpected snowstorm in Washington.

More notably from the Fed Chief were comments relating to the ‘thought process’ of the Federal Open Markets Committee (FOMC). She was adamant that the Fed would continue to ‘taper’ their bond buying program at a ‘measured pace’ but this time noted that ‘if there was any significant change in outlook’ then the FOMC would be open to ‘reconsidering’.

Key however to Yellen’s testimony was that the Fed would no longer use the improving unemployment figures as a guiding threshold by which to raise interest rates. Importantly, this frees up the FOMC to extend it’s loose monetary position, a clear signal that the Feds confidence in this recovery is beginning to waiver. The FOMC next meets on March 18th & 19th.

To contact the reporter of this story: James Brennan at james@forexminute.com