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Fed sticks to spending plan amid slow recovery (AFP)

WASHINGTON (AFP) – The US Federal Reserve Tuesday steered a steady course through a shallow economic recovery, keeping a massive spending plan intact and interest rates close to zero for the second year.

The central bank’s policymakers said the recovery was too weak to reduce high unemployment, a key challenge to getting the world’s largest economy back on a sustainable course, and inflation trends were worryingly weak.

“Information received since the Federal Open Market Committee met in November confirms that the economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment,” the FOMC said in a statement at the end of the panel’s final meeting of the year.

As widely expected, the FOMC left the key federal funds rate target between zero and 0.25 percent, where it has been since December 2009 in an attempt to support recovery from the Great Recession.

The panel “continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period,” it said, repeating now familiar wording.

The Fed noted “disappointingly slow” progress toward reaching the goals of its mandate to foster maximum unemployment and price stability, saying underlying inflation was hovering at a “somewhat low” level.

The slack conditions warrant the continuation of a 600-billion-dollar program of bond purchases announced after the last FOMC meeting on November 3, as well as reinvesting in its securities holdings, the policymakers said.

“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the committee decided today to continue expanding its holdings of securities as announced in November.

“The committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the committee intends to purchase 600 billion dollars of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about 75 billion dollars per month.”

The policy was endorsed by all but one member of the FOMC. Thomas Hoenig, president of the Federal Reserve of Kansas City, the Fed branch serving a seven-state region, voted against the policy as he has done since the beginning of the year.

Hoenig was concerned that in light of the improving economy, the Fed’s continued high level of monetary support would increase the risks would cause an an increase in long-term inflation expectations “that could destabilize the economy,” the FOMC statement said.

Critics of the Fed’s decision to pump an extra 600 billion dollars into the economy in a second round of quantitative easing, dubbed QE2, say it weakens the dollar and may spur damaging inflation.

“The statement implies that the Fed discussed whether QE2 should continue, just six weeks after it started,” Ian Shepherdson of High Frequency Economics said. “The discussion might have been entirely perfunctory but the fact that it happened at all suggests to us that if growth continues to pick up, QE2 is unlikely to reach the full 600 billion dollars.”

The Fed meeting came amid a slightly brighter US economic outlook than a month ago, and coincided with an unexpectedly strong surge in retail sales that could help drive the recovery onto firmer ground.

“With recent positive data and the announcement of an agreement on taxes and spending between President Obama and the Republican leadership in Congress, the Federal Open Market Committee has a little bit more breathing room,” said Augustine Faucher at Moody’s Economics.

The Fed’s efforts, combined with congressional approval of the tax-cuts measure, should trigger a virtuous cycle of job creation and rising consumer spending, Faucher said.

“The upcoming year will be a good one for the US economy.”

It, Fed sticks to spending plan amid slow recovery
(AFP)
extract from US Economy

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