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BY:VICTORIA MCGRANE AND JON HILSENRATH From: Dow Jones August 01, 2013 8:27AM
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FEDERAL Reserve officials kept the central bank's $US85 billion-per-month bond-buying program in place and pointed to modest growth, higher mortgage rates and low inflation as factors it is watching closely.

The Fed said that the economy has expanded "at a modest pace," during the first half of the year and also noted that mortgage rates "have risen somewhat."

The description of growth as modest appears to be a slight downgrade from the "moderate" growth Fed officials had been seeing in the economy. It is the first time in at least three years that the Fed has used the term "modest" to describe the economy in its formal policy statement. The Fed's comment about higher mortgage rates is also a new expression of concern in the statement.

Earlier Wednesday, the Commerce Department released new numbers showing the economy expanded at a rate of 1.7 per cent in the second quarter, beating expectations but still exhibiting lacklustre growth overall. The government also revised down its estimate of first-quarter growth to 1.1 per cent. Economists surveyed by Dow Jones Newswires had forecast GDP growth of 0.9 per cent for the second quarter.


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Fed gives Wall St a rocky ride

The overall performance showed that the US economy had struggled to gain momentum amid slow growth abroad, domestic political uncertainty, higher taxes and sweeping federal budget cuts. Still, some data suggested that the economy may perk up a little in coming months, supported by a resurgent housing market, renewed business spending and the diminishing effects of government tax and spending policies.

In its latest statement, the Fed placed new emphasis on inflation. "The Committee recognises that inflation persistently below its 2 per cent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

Inflation has been running near 1 per cent in recent months. The Fed kept its inflation and unemployment thresholds in place.

Fed officials also voted to keep short-term interest rates pinned near zero.

The markets took off on a wild ride in early May in reaction to Fed officials started trying to explain its expectations for the end of the bond-buying program. Volatility intensified after Fed Chairman Ben Bernanke set out a tentative timeline for the Fed to pull back the program during a June 19 press conference. Mr Bernanke said that if the economy continues to improve as the Fed expects, the central bank could make the first reduction in its bond purchases later this year and, possibly, conclude the program by mid-2014.

Jarred by the market's sharp reaction, Fed officials spent subsequent weeks trying to calm jittery markets and challenge perceptions that talk of scaling back the bond program meant the Fed was looking to raise short-term interest rates sooner than expected. Rates have been pinned near zero since late 2008.

The campaign appeared to work. Stock prices, which initially fell in response to news on the bond-buying front, have reached new highs. Interest rates moderated, but remain notably elevated from where they were in early May. Mr Bernanke has called the financial tightening "unwelcome" and expressed concern higher interest rates could be a drag on the recovery, though he said it was too soon to tell if any damage had occurred.

Eleven out of 12 Fed officials concurred with the policy statement. St. Louis Fed president James Bullard, who dissented at the last meeting, voted for the statement.

Kansas City Fed President Esther George dissented because she was concerned that the "continued high level of monetary accommodation increased the risks of future economic and financial imbalances" and could push long-term inflation expectations higher, according to the statement. Ms George has dissented now at all of the Fed's policy meetings this year.

The US dollar fell against major currencies after the Fed’s statement.

"The dollar selling was a knee-jerk reaction from some people in the market who were hopeful that we would have a signal for tapering to begin in September," said Michael Woolfolk, currency strategist at Bank of New York Mellon.

The US dollar eased to Y97.88 compared with Y98.05 late Tuesday. The euro soared to a six-week high, ending the New York session at $1.3303 versus $1.3262 late Tuesday. The Australian dollar fell below $0.90 to its lowest level since August 2010, trading more recently at $0.8981 from $0.9064.

Gold futures swung between $US1305.30 and $US1323.20 an ounce in electronic after-market trade as investors sifted through the FOMC statement. Gold floor trading had ended for the day at 1.30pm EDT, about half an hour before the Fed released its statement.

The most actively traded contract, for December delivery, settled down $US11.80, or 0.9 per cent, at $1313.00 a troy ounce on the Comex division of the New York Mercantile Exchange.

Gold prices have tumbled 22 per cent so far this year amid anticipation that the Fed would roll back the stimulus measure. Some investors worry that bond yields will rise in response, leaving little reason to hold a zero-yielding asset like gold.
Similar news report from TODAY...

US Fed stays on track with bond buying, for now

WASHINGTON — The Federal Reserve yesterday said that the United States economy continues to recover but is still in need of support, offering no indication that it is planning to reduce its bond-buying stimulus at its next meeting in September.

Wrapping up a two-day gathering, the central bank said it would keep buying US$85 billion (S$108 billion) in mortgage and Treasury securities per month in an effort to strengthen an economy that it said was still challenged by federal budget-tightening.

http://www.todayonline.com/business/us-f...buying-now
Update news report...

Drop in jobless rate ‘puts Fed closer to end of QE3’

PORTLAND — The United States Federal Reserve is nearer to dialling back its massive bond-buying programme after the unemployment rate dropped last month, a top Fed official said yesterday, the second to make that point in as many trading days.

A stalwart opponent of the Fed’s current third round of quantitative easing, or QE3, Dallas Fed President Richard Fisher said he personally would have liked to start trimming the programme some time ago.

“Unless we see some disturbing data, we should start in September,” Mr Fisher said, adding that he is not alone at the Fed in that view.

http://www.todayonline.com/business/drop...er-end-qe3
Related news report...

Smaller US trade gap could boost GDP growth

WASHINGTON — A sharp decline in the trade deficit with other nations suggests the US economy grew this spring at a faster pace than previously estimated, helped by a record level of exports.

The Commerce Department said yesterday (Aug 6) that the US trade gap fell more than 22 per cent in June from May to US$34.2 billion (S$43.3 billon). That’s lowest level since October 2009.

http://www.todayonline.com/business/smal...gdp-growth
More news report on US economic....

Despite increased spending, US budget deficit narrows

WASHINGTON — The United States ran a budget deficit in July, although government revenues increased from a year earlier due to tax hikes and a strengthening economy, a report from the Treasury showed yesterday.

The government spent US$98 billion (S$124 billion) more than it took in last month, with the deficit driven by spending on healthcare programmes, elderly pensions and the military.

Analysts polled by Reuters had expected deficit of US$96 billion.

The US has run full-year budget deficits since 2001 and the amount of red ink has increased since 2009 when a surge in unemployment fuelled higher spending on the social safety net.

This year, the deficit appears on track to narrow substantially. One major reason is that Washington has ratcheted austerity efforts by raising tax rates, which has helped tax receipts. It has also slashed the federal budget, although in July total spending rose to US$298 billion from US$254 billion in the same month last year.

Another factor that has been leading to a lower deficit is the steam that appears to be gathering in the US economy. That is also lifting tax receipts, which rose to US$200 billion last month from US$185 billion in July 2012.

http://www.todayonline.com/world/america...it-narrows
So far the signals were consistent...Big Grin

US retail spike points to improving economy

WASHINGTON — Retail sales in the United States rose last month, pointing to an acceleration in consumer spending that could bolster the case at the Federal Reserve for winding down its major economic stimulus programme.

Other data released yesterday showed that small businesses were more optimistic in July, although companies rebuilt inventories in June at an unexpectedly weaker pace.

Retail sales rose 0.2 per cent last month, the Commerce Department said. While the reading fell short of analysts’ expectations, a closely-watched category of sales that strips out cars, petrol and building materials posted its largest gain in seven months, rising 0.5 per cent.

The report suggests the economy could be regaining steam after tax hikes and federal budget cuts dragged on growth in the first half of the year.

http://www.todayonline.com/business/us-r...ng-economy
The tapering of QE in Sept seems more and more likely...

US jobs, inflation data support tapering of Fed bond buying

WASHINGTON — The number of new claims for jobless benefits fell to a near six-year low last week and consumer prices rose broadly in July, which could draw the United States Federal Reserve closer to trimming its massive bond-buying programme.

Government reports yesterday suggested an acceleration in job growth early this month and hinted at pockets of pricing power in the sluggish economy, which could ease concerns among some Fed officials that inflation was too low.

While data on manufacturing was less encouraging, economists were little fazed and said it merely suggested the improvement in factory activity was slower than had been anticipated.

The yield on the benchmark 10-year US Treasury note jumped to a two-year high on the data. Stocks on Wall Street suffered their biggest fall since June, also hurt by weak quarterly US sales from retail giant Wal-Mart Stores. The dollar briefly climbed to a near two-week peak against the euro.

http://www.todayonline.com/business/us-j...ond-buying
A caution on US recovery which worth a note...

US retailers say uneven recovery keeps consumers cautious

NEW YORK — From Wal-Mart and Gap to Macy’s and McDonald’s, chains that cater to middle- and lower-income Americans say they are feeling the pinch of an uneven economic recovery.

A host of retailers have reported tepid sales lately, highlighting the stress that consumers are feeling because of higher payroll taxes, expensive gasoline and a slow job market four years after the US economy started to rebound.

“Everyone wants to talk about recovery — it’s like the unrecovery,” Susquehanna Financial Group analyst Bob Summers said following the Wal-Mart results. “The demographic that they cater to, not only has it not seen improvement, I would argue that things have gotten worse.”

Look no further than Macy’s for a snapshot of the consumer. For its namesake mid-tier department stores, Macy’s reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That’s a contrast with Macy’s upscale Bloomingdale’s, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its US sales at stores open at least a year unexpectedly fell 0.3 per cent last quarter, a second decline in a row, prompting the world’s largest retailer to lower its sales forecast for the year.

Last week, a group of US retailers including Costco Wholesale Corp and Gap reported modest gains in July same-store sales, thanks largely to bargains.

Adding to the pressure, Macy’s said many shoppers are redirecting their spending to their cars, housing and home improvement.

http://www.todayonline.com/business/us-r...s-cautious
A precursor to tapering of QE, in mid Sept?

US Fed tells big banks to improve capital planning

WASHINGTON — Big banks must improve the way they determine how much capital they need to withstand any future crises, the United States Federal Reserve said, citing observations from regulators’ periodic tests of banks’ health.

The Fed said in a paper released yesterday that banks participating in regular “stress tests” had flaws in their capital planning processes, such as being unable to show that they considered all of the relevant risks to their businesses.

“Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do,” the Fed said.

Stress testing banks has become a key tool for regulators to monitor the health of the financial system after the 2007-2009 meltdown. The tests aim to determine whether the biggest banks are maintaining adequate capital levels by examining how they would weather a hypothetical market shock.

http://www.todayonline.com/business/us-f...l-planning
In spite of everything, not lest asset inflation, there are still groups of people who thinks QE doesn't work.

http://newsbusters.org/blogs/tom-blumer/...ress-yawns

The logical corollary would be that if that is true, then withdrawal of QE should have minimal impact on global economy. I would certainly like them to make this prediction in black and white. Funny enough I have not seen such prediction yet, not to be confused with those arguments that think QE is "capitalistically" wrong in the first place.
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