The Fed's announcement it will leave rates at zero until "at least" the end of 2014 makes a bit more sense in light of Friday's advanced fourth-quarter GDP report.
The U.S. economy grew 2.8% in the fourth quarter, the strongest since the second quarter of 2010 and up from 1.2% in the prior three quarters.
But growth was below consensus of 3% and the guts of the report suggested underlying weakness in the economy vs. strength, a big reason the Fed felt compelled to double-down on its zero interest rate policy. (See: Bernanke Pledges to Keep Rates Low Thru 2014: A "Very Pessimistic" Outlook, Former Fed VP Says)
U.S. stocks sold off in apparent reaction to the news, with the Dow recently down 0.7%.
But "let's not confuse the fundamentals with the market," my Breakout colleague Jeff Macke quips in the accompanying video, noting the market was arguably overdue for a pause after its stellar gains since mid-December.
Still, the fundamentals were not so rosy looking under the hood of the GDP data.
Inventory rebuilding accounted for nearly 2% of the growth and, excluding the restocking, real final sales rose just 0.8% in the quarter, down sharply from 3.2% in the third quarter. In addition, the personal savings rate fell to 3.7% vs. 5% in the first quarter of 2011 and business investment was tepid.
Government spending was also down for a fifth-straight quarter and 2.1% for all of 2011, the biggest decline since 1971. While less government spending is good for the deficit, it is another drag on economic growth.
"Bottom line: The stage is set for a significant slowdown in growth from the fourth to the first quarter, as inventories recede to more 'normal' levels," writes Diane Swonk, chief economist at Mesirow Financial. "The Fed appears to be validated...in its concerns about the outlook for the economy."
Nearly every economist came to a similar conclusion and this number, which itself is subject to revision, is likely to prompt some downward revisions to 2012 growth in the days ahead.
That said, 2.8% growth isn't chopped liver and, as Macke notes, "would've been celebrated like crazy" six months ago, when 'double-dip' fears were rife.
The bulls may be taking a well-deserved pause here but can take solace in the knowledge the economy is growing and the Fed is pledging to pull out all the stops, a potentially powerful combination for the market.