As widely expected, the Fed kept its bond-buying programme in place today, but contrary to our expectations the central bank offered no hint of a phasing down of its purchases later this year. Moreover, the FOMC statement took on a slightly more dovish tone, flagging the risk of inflation falling too far below its 2% target. Thus, the most significant change to the statement was the Fed?s new emphasis on inflation. ?The Committee recognizes that inflation persistently below its 2% objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,? the Fed said. That pledge was enough to prevent St. Louis Fed President Bullard, who last month expressed concern about falling inflation, from dissenting for a second time. Kansas City Fed president George once again voted against the decision due to concerns about potential harm to financial and economic stability from the Fed?s easy policy stance. On growth, the assessment highlighted ?modest? growth in H1, but the committee continues to expect growth to pick up from its recent pace. The description of growth as modest appears to be a slight downgrade from the ?moderate? growth Fed officials saw in June. (For more on today?s Q2 GDP report, see Five things you should know about today?s US GDP report ) The statement repeated that ?the Committee sees the downside risks to the outlook for the economy and the labor market as having diminished since the fall.? As noted, the Fed offered no indication that a reduction in the pace of its bond purchases is imminent. This was a surprise to us. Given the fact that GDP growth is still sluggish, the Fed probably wants more evidence that the economy continues to gain momentum in line with its expectations. However, because of the recent generally improving trend in economic data we still expect the Fed to begin tapering its purchases after the 17-18 September FOMC meeting, but the risk that the central bank postpones tapering until December has increased.
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