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Fed sees risks from Europe to US economy

Washington, December 14, 2011

The Federal Reserve on Tuesday warned that turmoil in Europe presents a big risk to the US economy, leaving the door open to possible further steps to boost growth even though it noted a somewhat stronger labour market.   

The central bank said the US economy was "expanding moderately" despite an apparent slowing in the world economy. But while there had been "some" improvement in the job market, unemployment remained elevated and housing depressed, it said.     

"Strains in global financial markets continue to pose significant downside risks to the economic outlook," the Fed said after a policy meeting, alluding to pressures stemming from the debt crisis in the euro zone, which has raised concerns about tighter credit in the US.

Some investors had speculated that the Fed might show more urgency about moving ahead with new measures to help the economy.

US stock prices fell, while prices for government debt rose. The dollar, which has been pressured by the Fed's huge-bond-buying programs, gained against the euro.

The Fed's statement was little changed from the one made after its last meeting in early November, although the US
central bank pinned uncertainty for the US economy more squarely on events in Europe.      

While in November it said risks to the outlook included global strains, on Tuesday it cited only the risk of volatility abroad.

Most economists have said the Fed's next meeting on January
24-25 would be the more likely occasion for any new moves to add to the US central bank's already extraordinary push to bring down borrowing costs and help growth.     

Tuesday's statement touched only lightly on signs of improvement in the economy's performance. "They are certainly ready to lean against the wind should the economy falter," said Cary Leahey, managing director at Decision Economics in New York.

The Fed offered no new guidance on the changing way it communicates its policies to financial markets; Fed chairman Ben Bernanke has made increased transparency a hallmark of his six years in charge of the central bank.

It also repeated that it expects inflation to settle at levels at or below those consistent with its price stability mandate. For a second time running, Chicago Fed President Charles Evans dissented against holding policy steady, saying he favoured additional easing now.

The US central bank has held overnight interest rates near zero since December 2008 and has bought $2.3 trillion in government and mortgage-related bonds in a further attempt to stimulate a robust recovery. 

Fed officials are divided among those who think high unemployment and sluggish growth require more action and those who view the central bank's already-aggressive efforts as bordering dangerously on an invitation to inflation. - Reuters




Tags: Europe | US economy | Fed |

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