Federal Reserve building in Washington. (Photo: AP)

Hours after the U.S. Commerce Department reported that first quarter growth had slowed to a mere 0.2%, the Federal Reserve on Wednesday reaffirmed its policy to keep short-term rates near zero and continue to reinvest the proceeds of the government and mortgage-backed debt purchased as part of its now-ended quantitative easing program.

In a statement that followed its two-day Federal Open Market Committee (FOMC) meeting, the Fed acknowledged that both the economy and job growth had slowed during the winter due in part to “transitory factors” but it anticipates that “with appropriate policy accommodation” the economy would rebound “at a moderate pace.”

For investors and market watchers looking for signs of when the Fed will raise interest rates for the first time since 2008, the Fed said it expects to raise rates when there’s “further improvement in the labor market and is reasonably confident that inflation will move back to its 2% objective over the medium term.”  

That means “no rate hike in June,” says Robert Brusca, Chief Economist of Fact and Opinion Economics, a consulting firm. “September is possible if the economy springs back but there may not be a hike this year at all.”

Ward McCarthy, chief financial economist at Jefferies, agrees. “The Fed is in no rush. At the current juncture, the timing of the liftoff is still indeterminate and will depend upon continued improvement in the labor market and the inflation data.”

And the data so far supports no change in Fed policy. The Fed’s favorite inflation indicator, the PCE deflator excluding food and energy, rose just 0.09% in the first quarter, according to the latest GDP report. Payroll growth in March was 126,000—the smallest gain in more than two years.

Even when inflation and job growth increase to levels consistent with the Fed’s dual mandate to foster maximum employment and price stability, the Fed said “economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Major stock market indexes initially fell further following release of the Fed’s statement, then rebounded from the lows. By 3pm the Dow was trading at 18,059, down 50 points. Bond yields were little changed with the 10-year Treasury at 2.05% in late afternoon trading.

– Check out Gundlach Says Market Hasn’t Seen Full Impact of Fed Moves on ThinkAdvisor