Weaker than expected economic activity was due in part, but not completely, to "unusually severe winter weather," resulting in a decrease in lowered projections for near-term output growth, according to minutes of the March 18-19 Federal Open Market Committee meeting.
"Largely because of the combination of recent downward surprises in the unemployment rate and weaker-than-expected real GDP growth, the staff lowered slightly the assumed pace of potential output growth in recent years and over the projection period," the minutes report. "As a result, the staff's medium-term forecast for real GDP growth also was revised down slightly. Nevertheless, the staff continued to project that real GDP would expand at a faster pace over the next few years than it did last year, and that real GDP growth would exceed the growth rate of potential output."
The minutes note that the risks to real GDP growth are to the downside since "the economy was not well positioned to withstand adverse shocks while the target for the federal funds rate was at its effective lower bound."
But, "several participants" said that while recent data changed downward their views for growth in late 2013 and the first quarter of 2014, the did not significantly revise their "projections of moderate economic growth over coming quarters."
Weather-related issues were expected to wane, allowing "economic activity to pick up."
A "few participants," pointed to "factors other than weather that had likely contributed to the slowdown," and "some of the pickup in economic growth that had appeared to have been indicated by the data available at the January meeting had been reversed by subsequent data revisions."
Progress was seen in the housing and labor markets, with participants expecting "a gradual decline in the unemployment rate over the medium term," despite slack in the market. "Several" members said factors other than the unemployment rate suggest "there might be considerably more labor market slack" than suggested.
"A couple" members "saw reasons to believe that slack was more limited, viewing the decline in the participation rate as primarily reflecting demographic trends with little role for cyclical factors and observing that broader measures of unemployment had registered declines in the past year that were comparable with the decline in the standard measure."
Several members stated concern about financial stability if certain trends continued. "A couple of participants pointed to the decline in credit spreads to relatively low levels by historical standards; one of these participants noted the risk of either a sharp rise in spreads, which could have negative repercussions for aggregate demand, or a continuation of the decline in spreads, which could undermine financial stability over time. One participant voiced concern about high levels of margin debt and of equity market valuations as well as a notable shift into commodity investments. Another participant stressed the growth in consumer credit to less creditworthy households."
