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Recovery Hopes & Rate Cuts


The US Federal Reserve has halted its most aggressive program of economic stimulus in 20 years, satisfied that "economic activity is beginning to firm" just as new numbers suggest the country's recession might be one of the mildest on record.

The Commerce Department has estimated that the economy returned to growth at a scant annual rate of 0.2 per cent in the last quarter of last year, in contrast to the consensus expectation of economists that the economy would shrink at an annualised rate of 1.1 per cent in that period...

The Fed's rate-setting committee, announcing on Wednesday that it had decided to keep official interest rates unchanged for the time being, said: "Signs that weakness in demand is abating and economic activity is beginning to firm have become more prevalent ... The outlook for economic recovery has become more promising."

It continued to worry, though, about the risks of economic weakness ahead, and used its customary code words to show that it stands ready to act again if necessary.

The Commerce Department, also on Wednesday, announced another surprise - that overall prices in the US economy had fallen at an annual rate of 0.3 per cent in the last quarter of last year, according to the GDP deflator, the broadest overall measure of prices in an economy.

"It's the biggest decline in prices since 1952," the Economic Cycle Research Institute's Mr Anirvan Banerji said. "Inflation isn't just weak - prices actually fell." The consensus forecast was, again, wildly mistaken, expecting a price rise of 1.7 per cent.

Mr Banerji explained that growth in the economy in the fourth quarter of last year had only been achieved because companies had cut the prices of goods in order to clear stockpiles. "The reason there was growth in the fourth quarter is that people bought stuff, and because prices have been falling, consumers have got a lot of bargains. This has not been a bad recession for the consumer. But it hasn't helped companies much. The price weakness means their profit margins have been under intense pressure. So the severity of the downturn was mitigated, but only at the expense of falling prices..."

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