WASHINGTON – The U.S. economy may not be strong enough for the Federal Reserve to slow its bond purchases later this year.
That’s the takeaway from economists after the government cut its estimate Wednesday of growth in the January-March quarter to a 1.8 percent annual rate, sharply below its previous estimate of a 2.4 percent rate. The main reason: Consumers spent less than previously thought.
Most economists think growth will remain low as consumers and businesses continue to adjust to federal spending cuts and higher taxes. Growth is expected to reach an annual rate of only about 2 percent in the April-June quarter.
Even if the economy improves slightly, it would be hard to meet the Fed’s forecast of 2.3 percent to 2.6 percent growth for 2013.
Chairman Ben Bernanke rattled investors last week when he said the Fed will likely slow its bond-buying this year if the economy continues to strengthen. The bond purchases have helped keep interest rates low. Bernanke added that if the economy weakens, the Fed won’t hesitate to delay its pullback or even step up its bond purchases again.
Jennifer Lee, senior economist at BMO Capital Markets, said that if the April-June quarter proves tepid, the Fed will be looking at three straight quarters of subpar growth.
The Fed won’t taper (its bond purchases) under these conditions, Lee said. They need convincing signs of a pickup.
Most of the revision to last quarter’s growth was due to a decline in consumer spending to an annual rate of 2.6 percent. Though that pace is the fastest in two years, it’s sharply below the 3.4 percent rate that had been estimated.