Fed damps rates expectations as economy loses momentum

The US recovery has lost momentum and the pace of hiring has moderated, the Federal Reserve said, acknowledging a weakening in the economy that has prompted markets to push back expectations of interest rate rises.

The central bank said that growth had "slowed" during the winter months reflecting "in part" transitory factors, while growth in household spending had declined even amid strong rises in real incomes, and exports had fallen.

However in its statement the Fed said that despite the weakening in output and employment growth it expects activity to expand at "a moderate pace".

The statement comes hours after official figures showed America's economic expansion faltered in the first quarter, with gross domestic product rising at a sluggish 0.2 per cent annual pace amid a surging dollar and weather-related disruptions.

The Fed in March put June on the table as the first possible month for a rate increase, removing its pledges to be "patient" about rate increases, but chairwoman Janet Yellen insists this does not mean the central bank is impatient to tighten policy.

Officials have taken a more cautious tack in recent weeks amid signs of soggier growth and weaker corporate hiring in March. Leaving interest rates unchanged at near-zero levels, the Fed did not rule out a June move in its statement, even if analysts expect such a move has become less likely.

Inflation continues to "run below" the Federal Open Market Committee's 2 per cent objective, the central bank added on Wednesday, adding that market inflation expectations remain low.

In its statement the Fed reiterated that it will raise rates when it has seen "further improvement in the labour market and is reasonably confident that inflation will move back to its 2 per cent objective over the medium term."

A key question is whether the numbers are set to repeat the pattern seen last year, in which the first quarter saw a 2.1 per cent slide in GDP, only to be followed by stellar growth numbers in the second and third quarters.

The growth figure was a fraction of the 1 per cent annual rate of expansion predicted by Wall Street economists, and marked a sharp slowdown from the 2.2 per cent pace recorded for the fourth quarter of 2014 and the 5 per cent expansion in the third.

Policy makers parsing the US GDP numbers needed to disentangle fleeting influences such as freezing winter weather and a port strike from longer-lasting factors, including the dollar surge, which is bearing down on exports and on consumer price growth, as well as the deep drop in oil-related investment.

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