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Economy

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Associated Press
A man walks by an electronic stock board of a securities firm Monday in Tokyo. Investors have been pivoting for months in speculation of a Federal Reserve decision on their bond stimulus program, which will affect key loan rates.

Investors wait for bond decision

Look to Federal Reserve for clues when it may raise long- or short-term loan rates

– When the Federal Reserve offers its latest word on interest rates this week, few think it will telegraph the one thing investors have been most eager to know: When it will slow its bond purchases, which have kept long-term borrowing rates low.

The Fed might choose to clarify a separate issue: When it may raise its key short-term rate. The Fed has kept that rate near zero since 2008. It’s said it plans to keep it there at least as long as unemployment remains above 6.5 percent and the inflation outlook below 2.5 percent.

Unemployment is now 7.6 percent; the inflation rate is roughly 1 percent.

Chairman Ben Bernanke has stressed that the Fed could decide to keep its short-term rate ultra-low even after unemployment reaches 6.5 percent. Testifying to Congress this month, Bernanke noted that a key reason unemployment has declined is that many Americans have stopped looking for jobs. When people stop looking for work, they’re no longer counted as unemployed.

If that trend continues, Bernanke said that lower unemployment could mask a still-weak job market and that the Fed might feel short-term rates should stay at record lows.

In the statement the Fed will issue when its two-day meeting ends today, it could specify an unemployment rate below 6.5 percent that would be needed before it might raise its benchmark short-term rate. It might also say that it won’t raise that rate if inflation remains below a specific level.

Investors would react to any such shift in the Fed’s guidance. Financial markets have been pivoting for months on speculation that the Fed will or won’t soon slow its $85 billion-a-month in Treasury and mortgage bond purchases. Those purchases have led more consumers and businesses to borrow, fueled a stock rally and supported an economy slowed by tax increases and federal spending cuts.

The Fed has signaled that it might slow its bond buying as soon as September – if the economy has strengthened as much as the Fed has forecast. If not, the Fed would likely maintain its stimulus.

The government today is scheduled to report how fast the economy grew in the April-June quarter. Most economists predict an annual rate of barely 1 percent – far too weak to quickly reduce unemployment. Most think the growth is picking up in the second half of the year on the strength of a resurgent housing market, stronger auto sales, steady job gains and higher pay.

Many economists think the key goal of the Fed’s policy discussions this week will be to stress that the Fed’s actions in coming months will hinge on how the economy fares, not on any timetable.

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