Fed Continues to Ease Bond Buys, Cites Uptick in Inflation

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Saul Loeb, AFP/Getty ImagesFederal Reserve Chair Janet Yellen
By Michael Flaherty and Jason Lange

WASHINGTON -- he Federal Reserve on Wednesday upgraded its assessment of the U.S. economy, taking note of a decline in the jobless rate and signaling more comfort that inflation was moving up toward its target.

Still, after a two-day meeting, Fed policymakers reiterated concerns about slack in the labor market and reaffirmed that it is in no rush to raise interest rates.

As widely expected, the central bank cut its monthly asset purchases to $25 billion from $35 billion, leaving it on course to shutter the program this fall.

"Labor market conditions improved, with the unemployment rate declining further," the Fed said in a statement. "However, a range of labor market indicators suggests that there remains significant underutilization of labor resources."

U.S. stocks turned modestly higher after the statement was released, while government bond prices extended earlier losses that had been spurred by a stronger-than-expected reading on economic growth. The dollar hit a session high against the yen.

Interest rate futures clung to the view that the Fed would raise borrowing costs from near zero in June of next year.

"The fact that officials still see excess slack in the labor markets as noteworthy suggests a high level of comfort with leaving rates very low," said Omer Esiner, chief market strategist at Commonwealth Foreign Exchange in Washington.

The Fed's policy-setting panel dropped a phrase from its last policy statement in June that had described the jobless rate as "elevated." Its emphasis on slack, however, indicated officials were looking at a broader range of indicators of the health of the jobs market and were still dissatisfied.

Inflation Moving Toward Target

As notable was the growing comfort officials signaled on inflation, which they had long worried was running too low.

"The committee ... judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat," the Fed said.

Taken together, the shifts in the Fed's statement marked a small step toward an eventual rate hike. The Fed has kept overnight rates near zero since December 2008 and has more than quadrupled its balance sheet to $4.4 trillion through a series of bond purchase programs.

The Fed reiterated that it would likely keep rates near zero for a "considerable time" after its bond buying ends and restated that an "accommodative" policy was needed.

The government Wednesday said the U.S. economy grew at a 4 percent annual rate in the second quarter, a figure that likely amplified the debate within the Fed about how soon rates should rise.

Some Fed officials have expressed concern that the central bank risks overstaying its welcome with low rates and fueling an unwanted level of inflation. Others, including Fed Chair Janet Yellen, have argued that considerable slack remains in the economy and are wary of moving too soon.

Although Yellen believes the nation's 6.1 percent unemployment rate overstates the health of the jobs market, she warned earlier this month that a rate hike could come "sooner and be more rapid than currently envisioned" if labor markets continue to improve more quickly than anticipated.

Payroll-processor ADP (ADP) said Wednesday U.S. companies hired 218,000 workers in July, a solid pace but a bit short of economists' forecasts. A more comprehensive report Friday is expected to show nonfarm payrolls increased by 233,000 in July, which would mark the sixth straight month with job growth above 200,000.

-Additional reporting by Gertrude Chavez in New York.

Fed Continues to Ease Bond Buys, Cites Uptick in Inflation
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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