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Federal Reserve weighs options to scale back $85B in monthly bond buys

| Friday, Aug. 30, 2013, 12:01 a.m.

WASHINGTON — A stronger-than-expected rise in economic growth last quarter will likely strengthen the hand of Federal Reserve officials who want to slow the Fed's bond purchases next month.

The economy grew at a 2.5 percent annual rate from April through June, the government estimated Thursday. That was more than twice the growth rate in the first quarter and far above an initial estimate of a 1.7 percent rate for April through June.

The Fed is weighing key measures of the economy's health before it meets Sept. 17-18 to decide whether to scale back its $85 billion in monthly bond purchases. The Fed's bond buying has helped keep long-term borrowing rates near record lows. A stronger economy would need less support from the Fed.

Global financial markets have been under pressure over speculation that the Fed will slow its purchases and send interest rates in the United States higher. Rates have already been rising in anticipation of a pullback in Fed bond buying. But the Fed may decide the economy is strengthening enough to withstand higher rates.

Last quarter's faster growth “should give Fed officials more confidence that the recovery is gathering steam,” said Paul Ashworth, chief U.S. economist at Capital Economics.

Other analysts think the Fed might decide to maintain the pace of its bond buying to help fuel the economy. They think Fed officials may conclude that the still-subpar economy could falter under the weight of higher interest rates, a slower housing rebound or a messy resolution to a fight over the federal budget.

Almost everyone agrees that the biggest factor the Fed will weigh in deciding whether to slow its bond buying will come next week: The employment data for August — the final jobs report before the Fed meets.

On Thursday, the government upgraded its estimate of growth for last quarter mainly because the trade deficit narrowed in June. That occurred because companies exported more goods than previously thought and imported fewer. The narrower trade gap offset weaker spending by the government.

For the second half of the year, analysts generally think the economy will grow at an annual rate of around 2.5 percent, fueled by steady job gains and a diminished impact from federal spending cuts.

That growth rate, though, would be too weak to meet the Fed's own forecasts for 2013. It might decide to delay any pullback in bond buying to await more data on how the economy is faring in the second half of the year.

James Marple, senior economist at TD Bank Group, noted that even with the government's higher estimate of second-quarter growth, the economy would have to accelerate at an annual rate of 2.8 percent to 3.4 percent in the second half to reach the Fed's growth forecast for 2013.

Doug Handler, chief U.S. economist at IHS Global Insight, noted: “We still have an economy that is not operating on all cylinders. And you have a variety of threats, ranging from rising interest rates to the tensions in the Middle East, that are causing anxiety for businesses and consumers.”

Another challenge for the economy: The Obama administration and Congress are locked in a battle over funding the government. Treasury Secretary Jacob Lew has said the government will run out of money to pay its bills in mid-October unless lawmakers raise the federal borrowing cap, which is capped at $16.7 trillion.

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