Firm US growth may lead Fed to slow bond buys

STILL CLOUDY::The Fed may have to weigh other concerns, such as a slower housing rebound or the impending budget fight, some analysts contend

AP, WASHINGTON

Sat, Aug 31, 2013 - Page 15

A stronger-than-expected rise in US economic growth last quarter will likely strengthen the hand of US Federal Reserve officials who want to slow the central bank’s bond purchases next month.

The economy grew at a 2.5 percent annualized rate from April through June, the government estimated on Thursday. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 percent rate for last quarter.

The Fed is weighing key measures of the economy’s health before it meets on Sept. 17 and 18 to decide whether to scale back its US$85 billion in monthly bond purchases.

The Fed’s bond buying has helped keep long-term borrowing rates near record lows. A stronger economy would need less support from the central bank.

CONFIDENCE

Last quarter’s faster growth “should give Fed officials more confidence that the recovery is gathering steam,” said Paul Ashworth, chief US economist at Capital Economics.

Other analysts think the Fed might decide to maintain the pace of its bond buying to help fuel the economy. They think Fed officials may conclude that the still-subpar US economy could falter under the weight of higher interest rates, a slower housing rebound or a messy resolution to a fight over the federal budget.

Almost everyone agrees that the biggest factor the Fed will weigh in deciding whether to slow its bond buying will come next week: the employment data for August.

On Thursday, the government upgraded its estimate of growth for last quarter mainly because the US trade deficit narrowed in June. That occurred because US companies exported more goods than previously thought and imported fewer. The narrower trade gap offset weaker spending by the US government.

For the second half of the year, analysts generally think the economy will grow at an annualized rate of about 2.5 percent, fueled by steady job gains and a diminished impact from federal spending cuts.

TOO WEAK?

However, that growth rate would be too weak to meet the Fed’s own forecasts for this year. It might decide to delay any pullback in bond buying to await more data on how the economy is faring in the second half of the year.

TD Bank Group senior economist James Marple said that even with the government’s higher estimate of second-quarter growth, the economy would have to accelerate at a rate of 2.8 percent to 3.4 percent in the second half to reach the Fed’s growth forecast for this year.

Another challenge for the economy: US President Barack Obama’s administration and Congress are locked in a battle over funding the government.

US Treasury Secretary Jack Lew has said the government will run out of money to pay its bills in the middle of October unless lawmakers raise the federal borrowing cap, which is capped at US$16.7 trillion.

In addition, expectations that the Fed will slow its bond buying have triggered problems in emerging nations. Anticipation of rising US interest rates has led investors to pull money from many of those nations and invest it in higher-yielding US assets.

On Thursday, for example, Indonesia’s central bank raised its benchmark interest rate by half a percentage point in hopes of stemming a fall in its currency’s value.