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Fed maintains strong stimulus, US growth stumbles

Washington, October 31, 2013

The Federal Reserve extended its support for a slowing US economy on Wednesday, sounding a bit less optimistic about growth and saying it will keep buying $85 billion in bonds per month for the time being.

In announcing the widely expected decision, Fed officials nodded to weaker economic prospects due in part to a fiscal fight in Washington that shuttered much of the government for 16 days earlier this month.

The central bank noted that the recovery in the housing market had lost some steam and suggested some frustration at how slowly the labour market was healing.

However, it also dropped a phrase expressing concern about a run-up in borrowing costs, suggesting greater comfort with the current level of interest rates.

"Available data suggest that household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months," the policy-setting Federal Open Market Committee said. "Fiscal policy is restraining economic growth."

The Fed's statement differed only slightly from the economic assessment it delivered after its last meeting in September, and the reaction in financial markets was relatively subdued.

US stocks sold off slightly, while the dollar climbed against the euro and the yen. Prices of US Treasuries turned negative, pushing yields higher.

"On balance, the Fed's statement was slightly less dovish than expected," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. He cited the central bank's abandonment of a phrase that expressed concern about an earlier tightening in financial conditions, including higher mortgage rates.

In its statement, the Fed said the labour market had shown "some" further improvement, tempering its description after a recent weakening in the jobs figures.

"Until the economic data strengthens, and strengthens meaningfully, I think expectations for tapering (the bond purchases) are going to remain subdued," said Krishna Memani, chief investment officer at Oppenheimer Funds in New York. "The likelihood of anything happening in December is modest."

Kansas City Federal Reserve Bank president Esther George dissented, as she has at every FOMC meeting this year, favouring a modest reduction in the pace of bond purchases.

UNTAPERED

The Fed shocked financial markets last month by opting not to scale back its bond buying, after allowing a perception to harden over the summer that it was ready to start easing off on the stimulus. Its caution has since been vindicated.

Consumer and business confidence has been dented by the bitter political fight that triggered the government shutdown and pushed the nation to the brink of a potentially devastating debt default, and a slew of recent data has pointed to economic weakness.

Reports on Wednesday showed US private-sector employers hired the fewest number of workers in six months in October, while inflation stayed under wraps last month.

Other recent data on hiring, factory output and home sales in September had already suggested the economy lost a step even before the government shut down. Readings on consumer confidence this month have shown the fiscal standoff rattled households.

The soft tone in the data has led markets to recalibrate forecasts for a tapering in the bond purchases and has pushed rate hike expectations further into the future.

After the Fed's decision, traders of short-term US interest-rate futures kept bets in place that the central bank will wait to raise overnight rates until at least April 2015.

In response to the deepest recession and weakest recovery in generations, the central bank lowered rates to near zero in December 2008 and has more than quadrupled its balance sheet to $3.8 trillion.

The Fed left its guidance on when it may raise rates unchanged, repeating that it would keep them near zero as long as the jobless rate remained above 6.5 per cent and inflation did not threaten to rise above 2.5 per cent.

The response to the Fed's aggressive easing of monetary policy has not been uncontroversial, with some Fed hawks and many Republicans arguing there is a risk of runaway inflation or financial market bubbles.

However, core Fed officials, including Chairman Ben Bernanke and his presumptive successor, Vice Chair Janet Yellen, have argued that the threat of persistently high unemployment is the most pressing issue right now.

Data on Wednesday showed consumer price inflation at just 1.2 per cent in the year through September, well below the central bank's 2 per cent target. - Reuters




Tags: Central Bank | inflation | bond | growth | Fed | Stimulus |

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