Fast Growth Does Little To Budge Fed's Caution — For Now

Jul 30, 2014
Originally published on July 31, 2014 5:30 am
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Transcript

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The U.S. economy is back on track after getting stuck in a snowy ditch at the beginning of the year. Today the government reported that during April, May and June the economy grew at an annual rate of 4 percent. The news came as Fed policymakers were wrapping up a two-day meeting in Washington. But as NPR's John Ydstie reports that better number didn't prompt any significant change in Fed policy.

JOHN YDSTIE, BYLINE: There's no doubt Fed policymakers welcomed the news of faster growth. In the statement they released after their meeting they said the economy has the underlying strength to support continued job growth.

BLU PUTNAM: The economy is pretty healthy out there.

YDSTIE: That's Blu Putnam, managing director and chief economist for the CME group. He says the 4 percent growth rate for the second quarter is confirmation that the U.S. economy is back on track. And despite the Fed's generally stand pat statement today, Putnam believes there's consensus forming at the Fed that it's time to normalize policy.

PUTNAM: I'm just suggesting that there's a core group in the Fed that I think is getting larger that just wants to exit anything that you might think of as an emergency policy. Because we're five years into this expansion, you really don't really need to be in emergency mode.

YDSTIE: The Fed statement indicated it is continuing to do that by winding down its stimulative bond buying program. It said it will reduce its bond purchases to $25 billion a month in August down from fly. But Putnam thinks a consensus is forming among Fed officials that it should also end its emergency zero interest rate policy sooner than previously planned. Right now the markets and most analysts expect the first rate hike to come sometime around the middle of next year.

PUTNAM: I'm more in the camp that they start to push rates higher early next year.

YDSTIE: And, says Putnam, the recent stronger job growth provides the Fed with a justification for raising rates sooner.

PUTNAM: But at the end of the day, if we're creating 200,000 plus jobs a month the economy's getting healthier every month.

YDSTIE: But while Fed officials acknowledge the improving labor market in their statement, they also introduce this new language, quote, "a range of labor market indicators suggest there remains significant underutilization of labor resources." There's little doubt Fed chair Janet Yellen was instrumental in inserting that cautionary line into the statement. Yellen has been clear, says John Canally of LPL Financial, that she is looking beyond overall job growth and the unemployment rate to measure the health of the labor market.

JOHN CANALLY: She looks at things like the amount of full-time workers to part-time workers - still way more part-time workers than average for this time in the business cycle. She looks at things like the median duration of unemployment - still way higher than it was before the downturn.

YDSTIE: These indicators lead Canally to believe the Federal Open Market Committee won't move faster to raise short-term rates.

CANALLY: The majority of the members of the FOMC are probably in the same mode that Janet Yellen's in which is probably lower for longer.

YDSTIE: And the statement from policymakers today said again that they will likely keep their target interest rate at its current level, essentially zero, for a considerable time. John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.