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Fed highlights 'solid' U.S. economic growth
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By LINDSAY DUNSMUIR, HOWARD SCHNEIDER
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REUTERS
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Saturday, July 14, 2018 – Print Edition, Page B2


WASHINGTON -- The U.S. Federal Reserve on Friday pointed to "solid" U.S. economic growth during the first half of the year in its semi-annual report to Congress, where it also reiterated that it expected to continue to raise interest rates gradually.

It is the Fed's second submission to lawmakers since chair Jerome Powell took the helm in early February. He is scheduled to answer questions on it before lawmakers on Tuesday and Wednesday.

Details of the 63-page report were consistent with the Fed's current outlook detailed at its policy meetings, which is that strong economic growth and low unemployment require rate rises, but that a lack of severe inflation pressures means they can remain gradual.

Financial markets were little moved following the release of the report.

"Over the first half of this year, overall economic activity appears to have expanded at a solid pace," the Fed said, adding that the economy continues to be supported by favourable consumer and business sentiment, past increases in household wealth, solid economic growth abroad and accommodative domestic financial conditions.

As such, the Fed "expects that further gradual increases" in interest rates would be appropriate as it strives to continue to nurture an economic expansion that is now the second-longest on record.

The Fed said the Trump administration's package of tax cuts had likely contributed to a rebound in consumer spending from a sluggish start to the year and will likely provide a moderate boost to economic growth this year.

The relatively rosy picture of the U.S. economy was also referenced by Mr. Powell in an interview on Thursday, in which he said he believes the U.S. economy remains in a "really good place" with recent government tax and spending programs set to boost gross domestic product for perhaps three years.

The Fed has raised interest rates seven times since it began a tightening cycle back in December, 2015, and last lifted its benchmark lending rate by a quarter percentage point in mid June.

The Fed sees another two rate hikes by year end.

The central bank barely weighed in on the potential impact of the Trump administration's protectionist trade policies, but noted that the uncertainty around them was a concern to financial markets. A number of policy makers have fretted that escalating trade disputes with Europe, Canada, Mexico and China could slow business investment and Mr. Powell said on Thursday that sustained high tariffs on products and services could hurt the economy.

"We don't see anything too surprising," Jim O'Sullivan, chief U.S. economist at High Frequency Economics in White Plains, N.Y., said of the report. "In short, Fed officials anticipate continued gradual tightening, assuming no major fallout from trade tensions."

Elsewhere in the report, policy makers once again flagged that wage growth has been weaker than they would have expected given the current unemployment rate of 4 per cent.

Wage gains have been "moderate," the report said, likely held down by weak productivity, and it highlighted the possibility that there could still be some further slack in the labour market, with more prime-age workers poised to enter the work force "if labour demand remains strong."

The Fed showed little concern about financial stability, saying Treasury markets were broadly stable and there was minimal evidence of liquidity pressures. However, it noted valuations were elevated for some assets and that an economic slowdown could amplify vulnerabilities for lowerrated corporates.


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