US economy has paused but growth expected to resume - Fed

30 January 2013 20:16  [Source: ICIS news]

WASHINGTON (ICIS)--The Federal Reserve Board on Wednesday said that the US economy has “paused” in recent months, but the US central bank nonetheless said it expects that growth will resume at a moderate pace and unemployment will decline gradually.

The Fed’s declaration of a pause in US economic activity came only hours after the Commerce Department reported that the nation’s gross domestic product (GDP) actually declined in the fourth quarter of 2012.

The department’s initial report on fourth quarter performance said that GDP fell by a narrow 0.1%, but that decline marked the first negative growth for the economy since the 2008-2009 Great Recession ended in June 2009.

In its statement, the Fed’s rate-setting federal open market committee (FOMC) said that “with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline”.

Apparently referring to the fourth quarter GDP decline, the Fed said that the pause in US economic activity was in large part due to “weather-related disruptions and other transitory factors”.

Hurricane Sandy struck the US northeast coast at the end of October, causing widespread damage and disrupting commerce for weeks.

However, some economists hold that while the hurricane certainly played a role in the fourth quarter decline, it was not the major cause and other underlying fundamentals and business uncertainties triggered the GDP fall at year end.

As expected, the Fed said that would keep its historically low federal funds interest rate at the current 0%-0.25%.  That rate has held constant since December 2008 when the US was in the throes of the 2008-2009 recession.

In addition, the Fed said that it would keep the rates at or near zero “at least as long as the unemployment rate remains above 6.5%” and inflationary pressures remain subdued.

That unprecedented link between the Fed's interest rates and unemployment was first established in December last yearThe US unemployment rate is now 7.8%.

The Fed also announced it would continue purchasing mortgage-backed securities at a pace of $40bn/month (€29.6bn/month) and keep buying long-term treasury bonds at a pace of $45bn/month in order to maintain downward pressure on long-term interest rates.

($1 = €0.74)

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By: Joe Kamalick
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