Wednesday, July 31, 2013

US Fed maintains QE plan, says expansion modest

    The U.S. Federal Reserve will continue to purchase $85 billion of assets a month to support stronger economic recovery and confirmed that a highly accommodative policy stance will remain in place after quantitative easing ends.
     While the Federal Reserve largely repeated last month's statement, it added that economic activity had  "expanded at a modest pace" in the first half of the year, a slightly weaker description than in June and earlier months when it used the word "moderate" to describe the economy.
    The Fed also added in this month's statement that inflation "persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."
     Taken together, these two minor changes to its statement may signal that a planned tapering of its asset purchase program later this year could be pushed back further, though the Federal Reserve's policy-making body, the Federal Open Market Committee, did not make any specific references to this.
    Overall, the Fed still saw diminished risks to its economic outlook, expecting economic growth to improve from its current pace due to its accommodative stance and that the unemployment rate will continue to decline.
    On June 19 Fed Chairman Ben Bernanke said the U.S. central bank would probably start reducing its asset purchases later this year and end the purchases mid-2014 if the economy continues to improve. Financial markets expect the process of trimming asset purchases will begin in September
    The Fed has held its policy rate, the federal funds rate, at 0-0.25 percent since December 2008 and repeated that it will maintain this policy stance for "a considerable time after the asset purchase program ends and the economic recovery strengthens."
    To give financial markets a better guidance of how long rates will remain at essentially zero, the Fed also repeated that the federal funds rate would remain at this level at least as long as the unemployment rate is above 6.5 percent and inflation does not exceed the bank's goal of 2.0 percent.
    U.S. Gross Domestic Product expanded by 1.8 percent in the first quarter from the fourth's quarter's 0.4 percent for annual growth of 1.8 percent, slightly up from the fourth quarter's 1.7 percent pace but down from the third quarter's 2.6 percent.
    The unemployment rate was stable at 7.6 percent in June and May, but up from April's 7.5 percent while the headline inflation rate in June was 1.8 percent, up from 1.4 percent the previous month and April's 1.1 percent.



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