12:01 GMT +312 November 2019
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    US Federal Reserve Touts Strong US Economy, Reaffirms Steady Policy Path

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    The US Federal Reserve has released its semi-annual report to Congress, outlining the state of the economy, and highlighting both the positive developments and emerging risks to economic and financial stability.

    Kristian Rouz — The US Federal Reserve says the pace of economic expansion is "solid" despite the mounting risks to international trade and flows of capital. The Fed made the remarks in its semi-annual report to Congress, saying the current macroeconomic data would allow for further increases in base borrowing costs in order to normalize monetary conditions in the US.

    The Fed's report highlighted low unemployment, ongoing job creation — particularly, in the private sector — as well as the robust expansion in the energy sector, utilities, and manufacturing. The Fed also stressed that inflation remains subdued, albeit somewhat in line with its 2-percent target.

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    Wall Street didn't react to the publication, suggesting investors and traders had pretty much expected and priced in the report's findings ahead of its release.

    "We don't see anything too surprising," Jim O'Sullivan of White Plains, N.Y.-based High-Frequency Economics said. "In short, Fed officials anticipate continued gradual tightening, assuming no major fallout from trade tensions."

    The Fed said over the first half of this year — which is also the first reporting period under the current Chairman Jerome Powell — that consumer and business sentiment have improved due to the support provided by tax cuts, gains in salaries and wages, and the still-accommodative costs of credit.

    The US central bank also observed an improved purchasing power of American households — despite elevated property prices and rents, as well as a sharp increase in fuel costs this year.

    "Higher oil prices now imply much less of a net overall drag on the economy than they did in the past," the Fed said in the report.

    Policymakers pointed to the rapid expansion in domestic oil output, meaning higher gasoline prices are greatly benefitting US-based companies for the first time since the great oil bust of 1986 — which wiped out the lion's share of US extraction.

    READ MORE: Federal Reserve Might Change Methodology as Old Indicators Don't Work

    Meanwhile, the risks to consumer sentiment — posed by the higher fuel costs — have been largely offset by the abundance of available jobs and labor shortages, most noticeably, in states like Texas and North Dakota.

    "Over the first half of this year, overall economic activity appears to have expanded at a solid pace," the Fed's report reads.

    Fed policymakers also said policy tightening will continue in the form of gradual hikes in interest rates, as well as further cuts to the central bank's bond portfolio. These measures are necessary to prevent the economy from overheating due to a relaxed fiscal environment.

    READ MORE: US Federal Reserve Might Adjust Obscure Interest Rate for Second Time

    The Fed also said the GOP tax reform enacted in December has boosted individual incomes and corporate earnings, which will contribute to a moderate acceleration in GDP growth this year. This comes amidst expectations of a second round of tax cuts, which could further alleviate America's middle class from fiscal burdens.

    The Fed also analyzed the effects of President Donald Trump's push to tax transnational corporations — whose activities have been almost tax-free for roughly three decades. The president's intent to slap customs duties of $250 billion worth of Chinese imports would significantly boost federal budget revenues, policymakers said, whilst also driving domestic inflation.

    This would allow the Fed to enact more aggressive measures aimed at normalizing monetary conditions at home.

    However, the Fed also said the tariffs could hold back the pace of economic expansion, not least due to other nations likely retaliating against US restrictions on their trade.

    "What's going on in the short run certainly isn't positive," Dallas Fed President Robert Kaplan said.

    Nonetheless, the US economy is in good shape, the Fed stressed, despite all the concerns of trade wars. Neither the expected disruptions in international trade nor rising oil prices could derail the ongoing expansion cycle, policymakers said, even while reiterating that they are closely monitoring the situation as it unfolds.

    "I think the economy's in a really good place," the Fed's Powell said in an interview. "I wouldn't say we've fully achieved (the inflation target) yet. We're not declaring victory there."

    And higher prices on imported goods could help the Fed achieve just that — as inflation is projected to overshoot the 2-percent target amidst solid consumer demand and an expected contraction in imports.

    Additionally, the Fed said US financial markets are stable, although stock valuations are a bit too steep, whilst bonds market have featured a higher degree of uncertainty over the past few months.


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