The U.S. dollar is rising against a host of other major currencies on Wednesday as traders bet that released minutes from the Federal Reserve’s most recent policy meeting in late July meeting will signal a growing confidence in the U.S. economy for the Fed to begin scaling back their monetary stimulus of $85 billion in monthly bond asset purchases through quantitative easing.
The unemployment level fell to 7.4 percent in July which is noticeably closer to the 7.0 percent level that Fed Chairman Ben Bernanke announced the Fed Reserve would like to phase out quantitative easing next year.
Many economists are predicting that the upcoming Fed meeting in September will likely be a good time for the Fed to slowly taper or “moderate” their asset purchases rather than abruptly pull back at the end of 2013 and early 2014.
Philip Shaw, chief economist from Ivestec Securities, told Bloomberg Countdown that he expects the Fed’s minutes will be a significant release that may lead to a gradual tapering of $ 10 billion at the next Fed meeting in September.
“If you are reasonably optimistic about the labor market over the next 6 months to a year, then at some stage the Fed actually has to start the tapering process now” Shaw said.
Besides labor data, U.S. inflation is another important economic barometer that Fed members consider when deciding about tapering the Fed’s monetary stimulus program.
The inflation rate in the United States, as measured by the producer price index (PPI), a measurement for businesses minus volatile energy and food costs, was up o.1 percent in July and has increased only 1.2 percent from the same period last year.
The Consumer Price Index for July shows core inflation at 1.70 percent, below the Federal Reserve’s 2 percent long-term target range.
According to the Fed’s statement, the Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment.
Low inflation has the potential to send prices lower and can eventually lead to deflation.
Following the Fed’s policy meeting on July 30-31st the Fed reported that inflation persistently below its 2 percent objective could pose risks to the economy’s performance even though the Fed expects inflation to push over 2 percent during the next 18 months.
On July 31st the U.S. Commerce Department reported that the U.S. economy grew at an annual rate of 1.7 percent in the 2nd quarter of 2013, up from consensus estimates of 1.0 percent and higher than the 1.1 percent revised annual rate in the first quarter that was formerly reported as 1.8 percent.