The Herald Bulletin

Morning Update

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March 20, 2013

Fed stands by stimulus, sees stronger US economy

WASHINGTON — The Federal Reserve said Wednesday that the U.S. economy has strengthened after pausing late last year but still needs the Fed's extraordinary support to help lower high unemployment.

In a statement after a two-day meeting, the Fed stood by its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent, as long as the inflation outlook remains mild. And it said it would continue buying $85 billion a month in bonds indefinitely to keep long-term borrowing costs down.

Investors seemed pleased with the Fed's decision to maintain its low-interest rate policies. The Dow Jones industrial average was up 76 points nearly an hour after the statement was released at 2 p.m. EDT, up 32 points from just before. The Standard & Poor's 500 stock index also added to its gains on the day.

The unemployment rate has fallen to a four-year low of 7.7 percent, among many signs of a healthier economy.

The Fed noted in its statement that the job market has improved, consumer spending and business investment have increased and the housing market has strengthened. But its latest economic forecasts, also released Wednesday, show that the Fed still doesn't expect unemployment to reach 6.5 percent until 2015.

The Fed also cautioned that government spending cuts and tax increases could slow the economy. It predicts that growth won't exceed 2.8 percent this year, slightly lower than its December forecast of 3 percent.

A total of 13 Fed officials still think the first rate increase won't occur until 2015, the same number as in December. One Fed official thinks the first boost in the short-term lending rate won't occur until 2016.

The statement was approved on an 11-1 vote. Esther George, president of the Kansas City regional Fed bank, dissented for a second straight meeting. She reiterated her concerns that the Fed's aggressive stimulus could heighten the risk of inflation and financial instability.

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