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US growth reverses course

4th-quarter ‘pause’ seen as temporary; Fed presses stimulus

– The Federal Reserve said Wednesday that the U.S. economy “paused” in recent months because of temporary factors and reaffirmed its commitment to stimulate growth by keeping borrowing costs low for the foreseeable future.

The Fed took no new action at its two-day policy meeting. But in a statement released after the meeting, it stood behind aggressive steps it launched in December to try to reduce unemployment.

In December, the Fed said it would keep its key short-term interest rate at a record low at least until unemployment falls below 6.5 percent. Unemployment is currently 7.8 percent. And the Fed said it would keep buying $85 billion a month in Treasurys and mortgage bonds to try to keep borrowing costs low and encourage spending.

The Fed’s decision to continue its stimulus programs was largely expected and had little effect on stock and bond prices.

Earlier in the day, the Commerce Department said the economy unexpectedly shrank at an annual rate of 0.1 percent from October through December. The first quarterly drop in growth since the last recession nearly four years ago was mainly because companies restocked at a slower rate and the government slashed defense spending.

In its statement, the Fed said “economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.”

Despite the slowdown, the statement noted that hiring continued to rise at a moderate pace, consumer spending and business investment increased, and the housing sector showed further improvement. And it said strains in global financial markets have eased somewhat, though it cautioned that risks remain.

The statement made no mention of deep cuts in defense and domestic spending that will take effect in March if Congress and President Obama don’t reach a deal to avert them. Those cuts threaten to keep growth weak in 2013.

At a glance

GDP: The Commerce Department said Wednesday the economy shrank at an annual rate of 0.1 percent in the last quarter 2012. GDP measures the nation’s total output of goods and services – from restaurant meals and haircuts to airplanes and appliances.
Key factors: Government spending cuts and slower company restocking, which can fluctuate sharply, subtracted a combined 2.6 percentage points from GDP. Those two factors offset a 2.2 percent increase in consumer spending.

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