NEW YORK (Reuters) - U.S. economic growth slowed more than expected in the first quarter, but a surprisingly hot quarterly Personal Consumption Expenditure inflation component suggested that the Federal Reserve would not cut interest rates before September.

Gross domestic product increased at a 1.6% annualized rate last quarter, the Commerce Department said in its advance estimate on Thursday. Economists polled by Reuters had forecast GDP rising at a 2.4% rate after growing at a 3.4% rate in the fourth quarter. The economy has defied prophecies of doom since late 2022 following the Fed's aggressive rate hiking campaign to stamp out inflation. Story

MARKET REACTION:

STOCKS: S&P 500 futures added to losses and were off 1.27%, pointing to a market fall at Wall Street's open

BONDS: U.S. 10-year yields rose to 4.721%; Two-year yields rose to 5.012% after the release

FOREX: The U.S. dollar index turned 0.113% firmer

COMMENTS:

OLU SONOLA, HEAD OF US ECONOMIC RESEARCH, FITCH

"This report comes in with mixed messages. It is a down shift in economic growth and it confirms the trend of accelerating inflation. Consumer spending was not as strong as expected, but the down shift in government spending is likely welcome news for the Fed. The hot inflation print is the real story in this report. If growth continues to slowly decelerate, but inflation strongly takes off again in the wrong direction, the expectation of a Fed interest rate cut in 2024 is starting to look increasingly more out of reach."

PETER CARDILLO, CHIEF MARKET ECONOMIST, SPARTAN CAPITAL SECURITIES, NEW YORK

"The economy continues to grow, but at a slower pace and you still have a sticky inflation, that just means that the Fed is not likely to cut in June and a big question mark for the remainder of the year."

"This is good news and bad news in the GDP because slower growth would ordinarily mean lowering of the dollar and yields, (but) with the PCE price deflator coming in on the higher side that is pushing up yields."

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NC (emailed note)

"This report was the worst of both worlds: economic growth is slowing and inflationary pressures are persisting."

"The Fed wants to see inflation start coming down in a persistent manner, but the market wants to see economic growth and corporate profits increasing, so if neither are headed in the right direction then that's going to be bad news for markets."

"We're looking ahead to tomorrow's PCE numbers because slowing inflation is the number one issue for the Fed and the rate cut (or even rate increase) debate has been heating up and that's what's injected so much uncertainty into bond and stock markets lately."

BRIAN JACOBSEN, CHIEF ECONOMIST, ANNEX WEALTH MANAGEMENT, MENOMONEE FALLS, WISCONSIN"GDP growth was a miss, but the details were deja vu all over again when it comes to consumption spending. Services were up, but goods were down. Final sales to private domestic purchasers increased 3.1% annualized, so domestic spending by households is still healthy despite the headline weakness. Unfortunately, it looks like spending on things like insurance and healthcare is beginning to squeeze out spending on other things.

The inflation numbers were not encouraging. The reacceleration of services prices to 5.4% annualized puts the Fed in a bit of a pickle. Growth is beginning to sputter while inflation has rebounded. It's the toxic mix central bankers fear the most."

KEVIN GORDON, SENIOR INVESTMENT STRATEGIST, SCHWAB, NEW YORK

    "The market is likely zeroing in on the hot inflation number in the report which was definitely a surprise."

    "In a way its a confirmation of the data that's been rolling in the last few months. It's a combination of services inflation taking much longer to come down and some upward pressure on commodity prices, which will eventually start to feed into headline inflation as well. It's unfortunately a cyclical upturn for parts of the commodities world but also just a very long disinflationary process for services. When you have both of those together, headline inflation just starts to re- accelerate."

    "If you looked at some of the meat and you know, the meatier components, there was still some resilience there. So for the most part, it's still a resilient growing economy in the face of inflation that is taking longer to come down. It's a better mix to have versus growth completely falling but inflation affects the Feds target."

     "It's not as if the Fed had already eased. If they'd already started to cut rates as this was happening that would be a concern. The good news is that they've held steady."

    "For the most part its still a resilient growing economy in the face of inflation that's still taking longer to come down."

    "What was pulling it down is net exports and inventories. If you take those out and you're just looking at consumption and business investments .. They would still look strong."

STUART COLE, CHIEF MACRO ECONOMIST, EQUITI CAPITAL, LONDON

"The market is reacting more to the PCE overshoot than the softer GDP print, and hence equity futures are lower."

"Interesting figures for the Fed today. The softer growth numbers, which if confirmed in later revisions, will by themselves be welcomed as a sign that at long last the U.S. economy is finally starting to slow down in the face of the monetary tightening that the Fed has delivered, which in turn can be expected to feed through into lower demand for labor and downwards pressure on wages.  But the Fed will probably be more concerned with the PCE numbers, which have provided yet another hot set of inflation readings and suggest the battle to return CPI to target is still far from being won."

"In many ways, the Fed is now finding itself caught between a rock and a hard place.  The growth numbers suggest monetary policy has worked its magic and the Fed's foot on the monetary brake can be eased somewhat.  But the inflation figures suggest otherwise, and potentially even point to the need for a further tightening. We know that returning CPI to target is the Fed's main objective and therefore, on balance, today's figure probably push an interest rate cut further down the road."

(Compiled by the Global Finance & Markets Breaking News team)