The chances of an early increase in US interest rates are fading fast after news that the world’s biggest economy came to a virtual standstill in the first three months of 2015.
On the day that the Federal Reserve was meeting to discuss US borrowing costs, Wall Street was shocked by news that growth had slowed to an annual rate of just 0.2% in the first quarter.
Financial markets had been braced for a slowdown in activity following brutal winter weather but not of the scale reported by the Commerce Department in Washington.
After growing at an annual pace of 2.2% in the final three months of 2014, economists had been forecasting a slowdown to 1% in the subsequent quarter – a period in which blizzards and a strike affecting west coast ports stifled activity.
The official data showed that the drop in crude prices had impacted on investment in the US oil and gas sector but that cheaper energy bills had yet to boost consumer spending. Growth in consumer spending slowed to an annual increase of 1.9% in the first quarter, down from 4.4% in late 2014 and the weakest for a year.
Construction output was badly hit by the poor weather, leading some analysts to predict that the US would bounce back quickly in the second and third quarters of 2015, as it did in 2014.
But recent data for retail sales, housebuilding and business investment has not been strong, suggesting the rebound will be less vigorous this time.
Earlier this year, Wall Street had been anticipating that the Fed would start raising interest rates in June, but concerns about the sluggishness of growth means that the expected date for a move by the central bank has been pushed back to September.
“A stalling of US economic growth at the start of the year rules out any imminent hiking of interest rates by the Fed,” said Chris Williamson of financial data provider Markit.
Paul Ashworth, chief US economist at Capital Economics, said: “Most Fed officials appear to share our view that this is a temporary slowdown, albeit a more severe deceleration than we previously anticipated. Accordingly, while it might delay the timing of the first rate hike, we still anticipate a lift-off later this year.”