Thursday, 1 August 2013

Fed sees risk of low inflation as economy accelerates

The Federal Reserve's monetary policy meeting ended on Wednesday with only a slight change to its stance. Reuters reports:

Wrapping up a two-day gathering, the central bank said it would keep buying $85 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.

The Fed made three notable adjustments to its post-meeting statement, which economists said gave it a dovish tilt.

First, it slightly downgraded its view of the recovery, calling the pace of growth "modest" rather than "moderate," as it had consistently for most of the past year.

It also noted that mortgage rates had risen, implicitly flagging this as a potential headwind to the housing recovery.

And, importantly, it nodded to the potential dangers of inflation running too low...

Investors noted the dovish tilt and acted accordingly. Treasuries rose, with the 10-year yield falling three basis points to 2.58 percent, and the US dollar fell.

The moves in Treasuries and the US dollar were despite positive US economic data on Wednesday.

The US economy grew at an annual rate of 1.7 percent in the second quarter, accelerating from a 1.1 percent pace in the first quarter.

ADP reported that private employers added 200,000 jobs in July after having added 198,000 in June.

Another report from the US on Wednesday showed that the Institute for Supply Management-Chicago business barometer rose to 52.3 in July from 51.6 in June.

Meanwhile, reports from Europe on Wednesday provided further signs that the economy may be stabilising. Unemployment in the euro area was unchanged at 12.1 percent in June. The inflation rate held steady at 1.6 percent in July.

Japan's economy, though, may have lost some momentum. The Markit/JMMA Japan manufacturing PMI fell to 50.7 in July from 52.3 in June.

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