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US Federal Reserve leaves policy unchanged despite stronger growth

The Federal Reserve on Wednesday (July 30) stuck to its plan of holding its base interest rate near zero while steadily trimming its stimulus, despite a surprisingly strong second-quarter economic growth report.

WASHINGTON: The Federal Reserve on Wednesday (July 30) stuck to its plan of holding its base interest rate near zero while steadily trimming its stimulus, despite a surprisingly strong second-quarter economic growth report.

The Fed as expected reduced its monthly bond purchases by US$10 billion, taking the programme to US$25 billion a month, but said the low federal funds rate remains needed to support growth and improvement in the labour market.

In a statement at the end of a two-day policy meeting, the Federal Open Market Committee acknowledged that the economy shows "sufficient underlying strength" to support the recent gains in job creation and cutting unemployment. However, it also suggested continued disappointment with the state of the jobs market, saying that various data "suggests that there remains significant under-utilisation of labour resources."

But in a significant shift that recognises the gains in the economy, the FOMC dropped its previous expression of concern over low inflation. "The Committee sees the risks to the outlook for economic activity and the labour market as nearly balanced and judges that the likelihood of inflation running persistently below two percent has diminished somewhat."

The statement came shortly after the Commerce Department reported that the economy grew at a 4.0 per cent annual rate in the second quarter, rebounding solidly from the first quarter's sharp contraction.

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