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Question;Wall Street JournalTepid Growth Restrains FedEasy Money to Keep Flowing for Now as Economy Plods Ahead, Inflation Stays TameThe U.S. economy registered subpar growth and low inflation in the first half of the year, factors thatled the Federal Reserve Wednesday to keep its easy-money policies in place.Simon Constable anchors full WSJ coverage of the Federal Reserve's decision on interest rates,including instant analysis from Chief Economics Correspondent Jon Hilsenrath. Photo: AP.The Commerce Department reported Wednesday that the economy grew at a 1.7% annual rate inthe second quarter, enough to ease fears of a full-on summertime economic stall but still a sluggishpace by historic standards. Economists had feared tepid global growth and the budget cuts knownas the "sequester" would lead to an even worse result of growth below 1% in the second quarter.Consumers kept spending despite higher taxes, business investment ticked up a bit after slowingearlier in the year and government spending cuts turned out to be smaller than feared, thegovernment said in its report on the nation's gross domestic producta measure of its total output ofgoods and services.Still, the April-June performance was only a small acceleration after the first quarter's revised paltry1.1% growth rate and represents little comeback from the end of last year, when the economy barelygrew.The Commerce Department also significantly reduced its estimates for the prior four quarters andsaid the annual pace of growth since the recovery began in mid-2009 was only 2.2%, well below thenation's long-term trend of over 3%.The overall view is of an economy moving in the right direction, yet mired in a sluggish recovery thatprevents it from bringing down unemployment quickly. "There is a fair amount of underlyingmomentum in the economy," said Nariman Behravesh, chief economist at I.H.S. Global Insight. "Butthe basic picture is essentially the same, a deep recession followed by a lackluster recovery."Against that backdrop, the Fed on Wednesday said it would continue an $85 billion-a-month bondbuying program meant to boost growth and hiring and offered no substantive changes in its stanceon how long the purchases would continue.Fed officials nodded in their statement to a few economic developments of late that could causethem concern if they persist. They described the pace of growth in the first half as "modest" andnoted risks to the economy if inflation runs "persistently below" their 2% objective, as it has been.The Commerce Department report showed inflation running near a 1% annual rate in the last threemonths, well below the Fed's goal.The description of growth was a smidgen more subdued than the Fed's previous one, which termedthe growth rate as "moderate." The Fed also pointed to higher mortgage rates as a concern. Still, theFed said it expects the pace of growth and inflation to pick up later in the year, as restraints fromhigher federal taxes and reduced government spending dissipate.The Fed's policy statement appeared to be crafted to avoid sending any strong new signals aboutthe central bank's already articulated plans to scale back its bond buying later this yearbut only ifthe economy perks up.Jon Mackay, senior fixed-income strategist for Morgan Stanley Wealth Management, said investorsshouldn't take the Fed's statement as a new sign that the central bank is willing to extend the bondbuying program beyond its previous plans.The Labor Department gives its latest snapshot of the job market on Friday, and another one a fewweeks before the Fed's Sept. 17-18 meeting. If each of those reports show the economy adding200,000 or more jobs and no "nasty, exogenous shocks" emerge, Mr. Mackay expects the Fed toannounce a reduction to the bond program at the September meeting. Other analysts think the Fedmight wait until December to slow its purchases.Markets seesawed Wednesday as traders digested the growth report and the latest statement fromthe Fed.The Dow Jones Industrial Average fell 21.05 points at 15499.54, after earlier hitting an intraday highof 15634.32. Bond prices rose, sending the yield on the 10-year U.S. Treasury note to 2.594%.The GDP report showed federal spending cuts were less of a drag on growth than they were inprevious quarters. State and local spending actually rose for the first time in a year. Meanwhile, bothbusiness investment and exports rebounded from first-quarter contractions, despite a recent string ofnegative reports from the industrial sector that had sparked fears that weakness overseas wasspreading to the U.S.AccuMold LLC, a Des Moines, Iowa-based firm that makes small components for devices likehearing aids, is seeing hefty demand from abroad. The 182-person firm sells roughly 70% of itsgoods abroad. But despite Europe's stagnation and worries that China's breakneck growth isslowing, AccuMold's export sales are up 20% from last year. Rising manufacturing costs in Asia arepushing clients to AccuMold, Chief Executive Roger Hargens said. He has hired about 20 engineersthis year and plans to hire 20 more.There are some signs the overall economy's acceleration could be short-lived. More than 24% of thequarter's growth came from an increase in inventoriesa buildup that is unlikely to be repeated andcould even be erased in subsequent data revisions.Consumer spending, which has been the backbone of the recovery recently, grew at a slower pacein the second quarter, with Americans cutting spending on hotels and restaurantsa possibleindication families are pulling back on discretionary items. It is also possible federal-governmentagencies may make more cuts in coming quarters.The outlook for consumers depends heavily on two factors: jobs and housing. The combination ofsteady job growth and a suddenly buoyant housing market helped households mostly shake off theeffects of tax increases that took effect in January.Data over the past two weeks have suggested the housing recovery remains on track, and thepayroll firm ADP on Wednesday said the private sector added 200,000 jobs in July.Steve Miller, the chief executive of Big 5 Sporting Goods Corp., BGFV +0.66%told analysts in aconference call this week that the firm saw its sales grow nearly 6% in the second quarter amid a"slight increase in customer traffic." Yet he also warned that sales are still being hindered by theexpiration of the payroll-tax holiday in January. "There's a segment of our consumer base that isaffected," he said.Wednesday's data revisions accentuated what was already something of an economic mystery: Therelatively strong pace of hiring seems out of step with weak economic growth. Economists hope thatjob growth will support consumer spending and boost economic growth, but they fear the opposite:that weak growth will lead employers to pull back hiring and thereby hurt spending.The latest report also included revisions to decades' worth of figures, incorporating both new dataand long-planned tweaks to how the government measures GDP. The new numbers make therecent recession look slightly milder and the recovery look slightly better. Economic growth has nowaveraged 2.2% since the recession ended in June 2009, a bit better than the 2.1% annual rate usingthe old data.The big picture remains unchanged. Four years after the recession officially ended, per capita outputand income have yet to return to their precrisis highs. The recovery still ranks as the worst sinceWorld War II. And despite the modest acceleration in the past two quarters, the recovery shows littlesign of gaining momentum.QUESTIONS:1. Why did the Federal Reserve decided to purchase bonds each month starting last fall? What isthe dollar value of the bonds it has committed to buying each month? What did the Federal Reserveannounce about the continuation of this program at the end of this week's monetary policy meeting?2. What reasons did the Federal Reserve give when making their announcement about their policyaction? In other words, what macroeconomic variables played a role in their decision? Does therelease of new macroeconomic data on the same day as the Fed's announcement make it likely theywill change their policy action sooner than originally thought?3. How in theory does the Fed's bond buying program affect interest rates, business investment,economic output, and price levels in the short run? Please include a well labeled figure to supportyour analysis.4. How in theory does the Fed's bond buying program affect economic output and price levels in thelong run? Do any Fed officials believe this is likely to occur anytime soon in the U.S. economy?Explain.

 

Paper#47999 | Written in 18-Jul-2015

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