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Fed keeps policy on course, says US economy picking up

The US economy nearly froze in the glacial first quarter but emerging signs of vigour kept the Federal Reserve on its stimulus taper track on Wednesday.

WASHINGTON: The US economy nearly froze in the glacial first quarter but emerging signs of vigour kept the Federal Reserve on its stimulus taper track on Wednesday.

The Fed shrugged off the shockingly weak 0.1 percent annual growth rate of the past quarter reported earlier in the day by the Commerce Department.

The Federal Open Market Committee, led by Fed Chair Janet Yellen, concluded after a two-day meeting that the economy remains in fairly good shape, able to handle the ongoing cutback in its bond-buying stimulus programme, but still in need of a near-zero interest rate.

Economic activity "has picked up recently after having slowed sharply during the winter in part because of adverse weather conditions," the FOMC said in its policy statement.

The first-quarter slowdown from a 2.6 percent expansion in the fourth quarter of 2013 was much worse than analysts expected; the average estimate was for a 1.0 percent rate.

But this was a rear-view mirror look at the economy, and for the Fed, most of the recent signposts were pointing to "moderate" growth and a gradual improvement in the jobs market.

As widely expected, the FOMC ordered another US$10 billion cut in its bond-buying programme, which has aimed at holding down long-term interest rates to encourage hiring and investment.

That took the quantitative-easing programme to US$45 billion a month, beginning in May, down from US$85 billion in December, when the stimulus taper was launched.

But it left the benchmark federal funds rate between zero and 0.25 percent -- where it has been since the end of 2008 -- noting inflation is restrained while unemployment "remains elevated".

"The Fed has been largely correct that the weakness we saw earlier this year would be temporary. Already, we've seen rebounds in retail sales, motor vehicle sales, business capital spending, and payroll employment in March," said Paul Edelstein of IHS Global Insight.

The FOMC statement, little changed from March, did not have any significant impact on stocks, bonds or the dollar, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange.

Still, the Dow Jones Industrial Average closed at a record high for the first time in 2014, gaining 0.27 percent at 16,580.84.

Growth in the first quarter was the slowest since late 2012. The world's largest economy has been losing steam for some time, with full-year GDP growth slowing to 1.9 percent in 2013 from 2.8 percent in 2012.

Driving the first-quarter US growth slump were falling exports and business investment and a larger decrease in inventory investment, the Commerce Department said.

Another key factor was a modest slowdown in consumer spending, which accounts for about two-thirds of US economic activity. Spending fell mainly on nondurable goods, like clothing and food and beverages.

Spending picked up for utilities, with heating bills shooting up during the winter freeze, as well as for healthcare as people signed up for insurance coverage under President Barack Obama's Affordable Care Act health reform.

The report is the first of three estimates on first-quarter growth.

The White House noted the January-March quarter was marked by unusually severe winter weather that included record cold temperatures and snowstorms.

"The president will do everything he can either by acting through executive action or by working with Congress to push for steps that would raise growth and accelerate job creation," said Jason Furman, chairman of Obama's Council of Economic Advisers.

The GDP data came as the World Bank reported on Wednesday that China's rapidly expanding economy could leapfrog the United States this year to become the world's largest economy, on a purchasing-power basis.

Commonwealth's Esiner said the recent improvements in the US economy should keep the Fed on track to wind down its asset-purchase programme around the end of this year. Investors currently expect the Fed to begin lifting borrowing costs around the middle of 2015, he said.

"The largely benign Fed announcement today keeps the market's focus squarely on Friday's payrolls report for April," he said.

The Labour Department is expected to report that the economy generated a net 210,000 new jobs in April, up from 192,000 in March, and that the unemployment rate slipped to 6.6 percent from 6.7 percent.

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