The Federal Reserve is expected to continue to pare its stimulus program this week despite weak first-quarter economic growth and officials will likely cite a recent pick-up in activity following a brutal winter.
The anticipated release of tepid first-quarter growth data Wednesday morning, followed by a generally upbeat Fed statement in the afternoon could paint a confounding picture of the economy. Many economists estimate the economy grew at an annual rate of 0.5% to 1%.
But Fed Chair Janet Yellen recently has taken pains to alleviate the confusion with this simple message: It's the weather. In a speech this month to the Economic Club of New York, Yellen said policymakers believe "a significant part of the recent (economic) softness was weather related."
Her view has been affirmed by reports showing a rebound in employment, retail sales, consumer confidence and factory output last month. "That should give them more confidence about the outlook for this year," says economist Paul Ashworth of Capital Economics.
Policymakers' brighter view will likely be reflected in a more bullish Fed statement following a two-day meeting, Ashworth says. The Fed last month said that "growth in the economy slowed during the winter months."
Besides adverse weather in January and February, weak export growth, another temporary factor, held back the economy in the first quarter, UBS said in a research note. Many analysts expect the economy to grow at a 3% rate or higher the rest of the year and average monthly job gains to exceed 200,000.
As a result, Ashworth and other economists expect the Fed this week to agree to reduce its monthly bond purchases by another $10 billion, from $55 billion to $45 billion. The bond-buying is intended to hold down long-term interest rates and spur economic activity. But policymakers have grown concerned about its diminishing benefits and rising risks, such as contributing to asset bubbles. They have been trimming the purchases since December.
Yellen told Congress in February that it would take a "notable" change in the Fed's economic outlook to pause the tapering, and the Fed is expected to halt the bond-buying by fall.
Fed officials have faced bigger challenges communicating when, and how quickly, the central bank will raise its benchmark short-term interest rate, which has been near zero since the 2008 financial crisis. At its March meeting, with the unemployment rate at 6.7%, the Fed eliminated its 6.5% jobless-rate threshold for considering its first rate hike. Instead, policymakers said they will consider a range of labor-market indicators, including the number of Americans working part-time who prefer full-time jobs.
That provided a fuzzier blueprint to financial markets. Stocks dove when Fed policymakers' forecasts, released after the meeting, showed sharper interest rate increases than expected. Yellen fueled the sell-off by suggesting that the first rate hike could occur six months after the bond-buying ends.
Yellen since has emphasized that rate increases will be gradual and will depend on the pace of the recovery.