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 After a two-day meeting, Fed policymakers took note of both faster
economic growth and a decline in the unemployment rate, but
expressed concern about remaining slack in the labor market.
"Labor market conditions improved, with the unemployment rate
declining further," the Fed said in a statement. "However, a range
of labor market indicators suggests that there remains significant
underutilization of labor resources."
The reference confirmed that the central bank believes there is
still a ways to go before benchmark borrowing costs need to move
higher despite an improving outlook for jobs and prices.
Nevertheless, the shifts from the Fed's last policy statement in
June marked a small step toward an eventual rate hike. The Fed has
kept overnight rates near zero since December 2008 and has more than
quadrupled its balance sheet to $4.4 trillion through a series of
bond purchase programs.
"It's a bit more hawkish than the previous statement," said Bricklin
Dwyer, an economist at BNP Paribas. "There is clear acknowledgement
of labor and inflation progress."
As widely expected, the central bank cut its monthly asset purchases
to $25 billion from $35 billion, leaving it on course to shutter the
stimulus program this fall.
U.S. stocks turned modestly higher after the statement was released
on relief over the Fed's patience with rates. But government bond
prices extended losses and the dollar held earlier gains as traders
saw an increased chance that borrowing costs could rise a bit
earlier than they had expected.
Interest rate futures suggested a greater probability of an initial
rate hike early next year, but still suggested the first increase
would most likely come in June 2015.
Driving home its message, the Fed reiterated that it would likely
keep rates near zero for a "considerable time" after its bond buying
ends. Philadelphia Federal Reserve Bank President Charles Plosser
dissented because he felt the phrase did not appropriately take into
account the economy's strides.
TWEAKING THE STATEMENT
Plosser and a few other Fed officials have expressed concern the
central bank risks overstaying its welcome with low rates and
fueling an unwanted level of inflation. Others, including Fed Chair
Janet Yellen, are wary of moving too soon.
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Yellen believes the nation's 6.1 percent unemployment rate
overstates the health of the jobs market, but she warned earlier
this month that a rate hike could come "sooner and be more rapid
than currently envisioned" if labor markets continued to improve
more quickly than anticipated. In June, the Fed's policy-setting
panel had described the jobless rate as "elevated," but it has
declined further since then and officials dropped the description.
The emphasis on slack, however, indicated policymakers were looking
at a broader range of indicators of the health of the jobs market
and were still dissatisfied.
As notable was the growing comfort officials signaled on inflation,
which they had long worried was running too low.
"The committee ... judges that the likelihood of inflation running
persistently below 2 percent has diminished somewhat," the Fed said,
referring to its price objective.
The government said on Wednesday that core inflation, which strips
out volatile food and energy costs, rose at a 2 percent annual rate
in the second quarter, its fastest pace in more than two years, as
the economy bounced back from a winter slump.
That report, which showed the economy grew at a 4 percent annual
rate in the second quarter, likely amplified the debate within the
Fed over how soon rates should rise.
(Reporting by Michael Flaherty and Jason Lange; Additional reporting
by Gertrude Chavez in New York; Editing by Tim Ahmann and Paul
Simao)
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