Fed Sees Moderate Growth, Maintains Current Stance

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The Federal Reserve sees moderate growth in the U.S. economy, but little progress in job creation. As a result, the Fed made no major changes to its quantitative easing policy in January, according to meeting minutes released Wednesday.While noting that asset sales would have to shrink "substantially over time," members agreed "that no changes to the Committee's large-scale asset purchase programs or to its target range for the federal funds rate were warranted at this meeting, inasmuch as the asset purchase programs were nearing completion and neither the economic outlook nor financial conditions had changed appreciably since the December meeting,"according to the minutes.

"Accordingly, the Committee affirmed its intention to purchase a total of $1.25 trillion of agency MBS [mortgage-backed securities] and about $175 billion of agency debt by the end of the current quarter and to gradually slow the pace of these purchases to promote a smooth transition in markets," the Fed added.

Core Inflation Subdued

On inflation, the Fed said that "headline inflation had been variable, largely reflecting swings in energy prices, core measures of inflation were subdued and were expected to remain so."

On U.S. economic growth, the Fed said that, "though mixed, [it] indicated that economic growth had strengthened in the fourth quarter, that firms were reducing payrolls at a less rapid pace, and that downside risks to the outlook for economic growth had diminished a bit further."

On labor market conditions, the Fed noted that weakness in labor markets "continued to be an important concern for the FOMC; moreover, the prospects for job growth remained an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending."

Overall, the minutes suggest a slightly more positive U.S. economic outlook from the Fed in January. The Fed senses that the economic recovery is approaching self-sustaining status, perhaps opening the door to an interest rate hike in Q3, but not before then. Further, inflation will have as much to say about when the Fed hikes rates as unemployment. The persistence of the current mild inflation rate should buy the Fed more time to maintain its low interest rate policy.
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