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Fed ends QE3, keeps rate low

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‘Solid job gains and a lower unemployment rate’ ends QE3 overnight.

The Federal Reserve said the U.S. labour market has strengthened enough to withstand an end to its unprecedented asset-purchase program and downplayed risks posed by declining inflation.

The statement said “solid job gains and a lower unemployment rate” since its last gathering in September, further adding “underutilization of labour resources is gradually diminishing,” modifying earlier language that referred to “significant underutilization.” Stocks and Treasuries declined while the dollar strengthened as the Fed raised its assessment of an economy that has generated a monthly average of more than 200,000 jobs this year, driving unemployment down to a six-year low.

While saying inflation in the near term will probably be held down by lower energy prices, Fed officials repeated language from their September statement that “the likelihood of inflation running persistently below 2% has diminished somewhat.”

The personal consumption expenditures index, the central bank’s preferred price gauge, increased 1.5% in August and hasn’t exceeded the Fed’s 2% target since March 2012.

The Federal Open Market Committee (FOMC) repeated it will consider a wide range of information in deciding when to raise the federal funds rate, which has been held near zero since December 2008. Most Fed officials expect to raise the rate next year, according to projections released last month.

The Fed said rates could rise sooner than currently anticipated if it makes faster progress toward its goals of full employment and stable prices. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

In New Zealand, its central bank signalled it will keep interest rates on hold for an extended period as inflation slows and the currency remains unjustifiably high.

Lower commodity prices and increased global financial market volatility have taken some pressure off the New Zealand dollar,” Wheeler said. “However, its current level remains unjustified and unsustainable and continues to constrain growth in the tradable sector.

Wheeler’s description of the exchange rate mirrored language the central bank used before it intervened in August. The RBNZ sold a net NZ$521 million that month, the most since 2007. It updates September currency sales later today.

The RBNZ raised the benchmark rate four times between March and July, becoming the first developed-world central bank to raise rates this year. The consumers’ price index rose 1% in the third quarter from a year earlier. That was less than the 1.3% pace projected by the RBNZ in its September statement.

Weak global inflation, falling oil prices and the high currency are keeping price growth modest, Wheeler said in today’s statement. House prices are rising at a slower rate and wage increases are subdued.

Growth in the New Zealand economy has been faster than trends elsewhere in 2014, adding to demands on capacity and reducing unemployment. Growth has been stoked by construction, high immigration and rates that remain low by historic standards, he said.

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