by Xinhua writer Liu Jie
WASHINGTON, May 29 (Xinhua) -- The U.S. economic recovery encountered a "moderate setback" in the first quarter, but a sizable bounceback is expected in this quarter, David Stockton, former chief economist of the Federal Reserve, said in an interview with Xinhua.
He played down the possibility of a more imminent and steeper rise in the federal funds rate, as the economy "continues to only muddle along."
The U.S. economy shrank at an annual rate of 1.0 percent in the first quarter on weaker-than-expected trade and private investment amid the brutally cold weather. It is the first contraction since the first quarter of 2011. The government initially estimated that the economy would grow 0.1 percent.
Stockton said the severe winter weather no doubt held back activity in the first quarter, which was seen most clearly in the construction sector. Businesses also appear to have trimmed production to reduce the pace of inventory investment. A buildup of inventories had boosted activity in the second half of last year, and this simply was not sustainable.
Businesses' spending on capital equipment was quite weak in the first quarter, reflecting their lingering cautious outlook for the economy. "All told, the first quarter weakness in real GDP was a setback for the U.S. recovery, but only a modest one," he noted.
The Fed's monetary policy will not be much affected by the weakness in the first quarter. The focus of the Fed will now be on gauging the strength of the bounceback in activity in the second quarter, he said.
The most recent incoming data suggest that the growth in real GDP has picked up noticeably in the second quarter. "I expect that we will see a sizable bounceback this quarter," he said, noting consumer spending appears to have strengthened, construction has turned up and capital spending has firmed.
He also noted housing is an area of concern. "It had been an important bright spot in the U.S. economy, and this sector will need to rebound if forecasts for a more rapid recovery are to be proven correct."
Rising mortgage rates and housing prices have curtailed the housing market recovery since mid-2013.
Stockton said there were signs of some softening in housing markets before the bad weather occurred. The run-up in interest rates that followed the Fed's talk of tapering last spring has possibly weakened housing demand, and the Fed will need to monitor this sector closely as it withdraws its accommodative policy, he said.
The Fed had decided to cut the bond purchase program by 10 billion U.S. dollars since May, and pledged to keep the accommodative monetary policy long after the economy returns to normal.
"If the data available between now and the June FOMC meeting continues to trace out a pattern of improvement, the Fed is likely to continue to taper their purchases of assets," he said.
Fed minutes showed that a few Fed members judged that additional clarity about the Fed's reaction function could be particularly important in case future economic conditions necessitate a more rapid rise in the target federal funds rate than the Fed currently anticipates.
"The economy could always prove more resilient than the Fed anticipates.And if that occurs, market participants will appropriately begin to price in a more rapid rise in the federal funds rate. A more rapid pickup in inflation could also trigger a more imminent and steeper rise in the federal funds rate," Stockton said.
"But I see those risks as relatively minor at this point. The economy continues to only muddle along, and inflation remains well below the Fed's two percent target. Chair Yellen has stressed that the Fed will be patient in removing monetary accommodation, and I suspect she should be taken at her word."