US economic growth slowed sharply in the first quarter of 2023 despite strong consumer spending, as the Federal Reserve ploughed ahead with its historic monetary tightening campaign.

The world’s largest economy grew by 1.1 per cent on an annualised basis between January and March, according to preliminary data released by the Commerce department on Thursday.

That marked an abrupt deceleration from the 2.6 per cent pace registered in the final three months of last year and came in well below economists’ expectations of a 2 per cent increase.

US government bonds sold off after the data was released, pushing yields on the two-year Treasury up 0.08 percentage points to 4 per cent.

The GDP figures showed that the US economy continued to exhibit pockets of strength even though its momentum ebbed. Strong consumption growth over the three-month period offset a drag from inventories and a slowdown in housing and business investment.

Inflation-adjusted consumer spending rose at a 3.7 per cent annual rate, up from 1 per cent in the last quarter of the year. Meanwhile, private domestic investment fell nearly 13 per cent. Final sales to private domestic purchasers — a measure of consumer and business spending considered one the most important proxies for underlying demand — rose at an annualised rate of 2.9 per cent in the first three months of the year. That followed muted gains last year with no change in the fourth quarter of 2022.

The broader growth slowdown comes as the Fed has pursued a year of aggressive monetary tightening in a bid to damp demand. Since March last year, the US central bank has lifted its benchmark policy rate from near zero to just under 5 per cent, the fastest increase in decades.

Officials are poised to deliver another quarter-point rate rise next week, which would raise the federal funds rate to a new target range of 5 to 5.25 per cent, before considering a pause in their rate-rising campaign.

A pause from June would allow Fed policymakers to assess the impact of their actions over the past year as well as the severity of the credit crunch stemming from the recent banking turmoil that chair Jay Powell has previously said could have the same effect as rate tightening. But some officials have not ruled out further action by the Fed if warranted by the data.

What has kept officials on edge is the surprising resilience of the consumer, which has been buoyed by a tight labour market. But nascent signs of a cooling in monthly jobs gains and wage growth have provided some comfort that the worst of the inflation shock has passed and that the Fed is moving closer to getting price pressures under control.

Officials maintain that in order to return inflation to the Fed’s longstanding 2 per cent target, it will require a period of “below-trend growth and some softening in labour market conditions”, but they have stopped short of forecasting a recession.

The official arbiters of whether or not the US is in recession — a group of economists at the National Bureau of Economic Research — characterise one as a “significant decline in economic activity that is spread across the economy and lasts more than a few months”. 

As of March, most officials expect inflation-adjusted GDP growth to slow to 0.4 per cent in 2023, before rebounding to 1.2 per cent the following year. The unemployment rate, meanwhile, is projected to peak at 4.6 per cent in 2024, according to most officials, up from its current level of 3.5 per cent.

Notably, Fed staff have a more downbeat view, projecting that the economy will slip into a recession this year before staging a recovery.

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