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Timing of US stimulus easing still unclear

The timing of the Federal Reserve’s plan to reduce its stimulus program remained unclear after minutes of their last meeting showed divisions over the strength of economic growth.


Some policymakers at the July 30-31 meeting of the Federal Open Market Committee (FOMC) believed that “it might soon be time to slow somewhat the pace” of the $US85 billion ($A94.31 billion) a month in bond purchases, aimed at holding interest rates down.

But others in the group emphasised “the importance of being patient” before cutting back stimulus, revealing concerns about whether the economy will pick up pace as expected in the second half of this year, the minutes showed.

Together the Fed’s policy-makers agreed at the meeting to stick to the timetable announced in June to begin tapering the stimulus later this year if the economy broadly continued to improve.

But the minutes showed an ongoing tentativeness about that commitment, rooted in a divergence of opinions on how strong economic growth is.

The 12 FOMC voting members and five alternates were “generally” confident in forecasts that the economy would pick up speed later this year and accelerate in 2014.

But “a number” were worried that government spending cuts could hold back growth, and that higher interest rates – from market expectations that tighter money conditions are indeed nigh – will dampen the rebound in the housing industry.

Moreover, some questioned what the recent fall in the unemployment rate said about the strength of the jobs market.

“The employment-to population ratio, together with a high incidence of workers being employed part time for economic reasons, were generally seen as indicating that overall labour market conditions remained weak,” the minutes said.

With global emerging economy markets locked in turmoil over the prospects of tighter money conditions driven by Fed policy, the minutes gave up no more than a confirmation that the Fed in the near future will begin cutting back its bond purchases – as long as US economic improvements remain on track.

The minutes showed the members of the FOMC sensitive to market reactions to its pronouncements, after expectations of a tapering in the bond purchases drove up Treasury bond yields sharply in the past four months.

“However, participants were satisfied that investors had come to understand the data-dependent nature of the Committee’s thinking about asset purchases,” the minutes said.

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