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Thursday, 3 September 2009

US economy vulnerable: Fed

WASHINGTON - THE Federal Reserve said on Wednesday that the US economy remained 'vulnerable to adverse shocks,' with the weak labor market of 'particular concern'.

In minutes released from the Federal Open Market Committee (FOMC) meeting on Aug 11 - 12, the central bank said that 'most participants saw the economy as likely to recover only slowly during the second half of this year, and all saw it as still vulnerable to adverse shocks.' 'Labour market conditions remained of particular concern to meeting participants,' the minutes said.

The publication of the FOMC minutes came ahead of the government's employment data for August due on Friday. The Labor Department jobs report, seen as one of the best indicators of economic momentum, is expected to show job losses slowed and the unemployment rate rising to 9.5 per cent, from a 26-year high of 9.4 per cent in July.

Payrolls firm ADP reported on Wednesday that the private sector shed 298,000 jobs in August, the smallest number of jobs since September 2008, adding to data indicating an improvement in the albeit dire jobs market.

Members of the policy-making FOMC commented about the continued 'poor' conditions in the labour market that were expected to improve only slowly. 'Business contacts generally indicated that firms would be quite cautious in hiring when demand for their products picks up,' the minutes said.

The Fed policymakers agreed that the incoming data and anecdotal evidence since the previous FOMC meeting on June 23 - 24 'had strengthened their confidence that the downturn in economic activity was ending' and that growth probably would resume in the second half of the year.

Though participants expected the pace of recovery to pick up in 2010, they expressed a range of views, 'and considerable uncertainty,' about the likely strength of the upturn - 'particularly about the pace of projected gains in consumer spending and the extent to which credit conditions would normalise.' The central bank policy-makers 'now saw smaller downside risks' to their economic growth forecasts than observed in the prior meeting.

With prospects of only a gradual uptick in economic activity, substantial resource slack amid weak demand and subdued inflation, the FOMC decided to hold its key target interest rate at near-zero.

'The committee thought it most likely that the federal funds rate would need to be maintained at an exceptionally low level for an extended period,' the minutes said.

Most participants expected that conditions would lead to 'subdued and potentially declining wage and price inflation over the next few years; a few saw a risk of substantial disinflation'.

The FOMC also agreed to maintain its programme of asset purchase to support the recovery, but decided to slow the pace of a US$300 billion (S$432 billion) programme to buy Treasury securities and extend the wind-down of that programme to the end of October 'to help promote a smooth transition in markets.' -- AFP

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