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Stronger U.S. growth may lead Fed to slow bond buys

Jeff Caldwell checks a chassis on a Chrysler assembly line in Detroit in May. The U.S. trade deficit narrowed in June. U.S. companies exported more goods and imports declined.

Associated Press

Jeff Caldwell checks a chassis on a Chrysler assembly line in Detroit in May. The U.S. trade deficit narrowed in June. U.S. companies exported more goods and imports declined.

WASHINGTON — A stronger-than-expected rise in U.S. economic growth last quarter will likely strengthen the hand of Federal Reserve officials who want to slow the Fed's bond purchases next month.

The economy grew at a 2.5 percent annual rate from April through June, the government estimated 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 April through June.

The Fed is weighing key measures of the economy's health before it meets Sept. 17-18 to decide whether to scale back its $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 Fed.

Global financial markets have been under pressure over speculation that the Fed will slow its purchases and send interest rates in the United States higher. U.S. rates have already been rising in anticipation of a pullback in Fed bond buying. But the Fed may decide the economy is strengthening enough to withstand higher rates.

Almost all analysts agree 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 — the final jobs report before the Fed meets.

On Thursday, the government upgraded its estimate of growth for last quarter mainly because the U.S. trade deficit narrowed in June. That occurred because U.S. companies exported more goods than previously thought and imported fewer.

James Marple, senior economist at TD Bank Group, noted that even with the government's higher estimate of second-quarter growth, the economy would have to accelerate at an annual rate of 2.8 percent to 3.4 percent in the second half to reach the Fed's growth forecast for 2013.

Doug Handler, chief U.S. economist at IHS Global Insight, noted: "We still have an economy that is not operating on all cylinders."

Another challenge for the economy: The Obama administration and Congress are locked in a battle over funding the government. Treasury Secretary Jacob Lew has said the government will run out of money to pay its bills in mid October unless lawmakers raise the federal borrowing cap, which is set at $16.7 trillion.

In light of the uncertainties, Handler said he expects the Fed to delay any reduction in its bond purchases until December.

Stronger U.S. growth may lead Fed to slow bond buys 08/29/13 [Last modified: Thursday, August 29, 2013 9:49pm]
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