US economy grows by 4% as Fed cuts stimulus

Job fair in US A separate report showed that private employers added 218,000 jobs in July

The US economy grew at an annual rate of 4% during the April-to-June period, latest figures released by the US Department of Commerce have shown.

The growth during the second quarter reverses the contraction seen earlier in the year.

Following the report, the Federal Reserve said it would continue to ease back on its stimulus efforts.

In a widely-expected moved, the Fed announced a cut to its bond purchases to $25bn (£15bn) a month from $35bn.

The central bank has been buying bonds in an effort to keep long-term interest rates low and thus encourage spending, rather than saving, by businesses and consumers.

Big spending

"Information received since the Federal Open Market Committee met in June indicates that growth in economic activity rebounded in the second quarter," said the Fed in a statement after its two-day meeting in Washington, DC.

Consumer spending - which makes up over two-thirds of US economy activity - grew by a robust 2.5% during the second quarter.

Business spending increased by 14% in the world's largest economy, as businesses restocked inventories.

In the previous quarter, from January to March, the US economy shrank a revised 2.1% on an annualised basis, as a result of harsh winter weather.

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Even with the rebound, many economists believe that the harsh winter will weight on growth for the year, which is expected to be around 1.6% - less than in 2013.

Inflation fears

The Fed also added that the labour market continued to be weaker than expected, and said that it planned to keep short term interest rates low for the foreseeable future, at least until mid-2015.

Some have worried that keeping rates so low could spur inflation.

The Commerce Department figures showed that inflation, as measured by a component of the overall GDP report, increased by 1.9% - which is within the Fed's target, but an increase from the 1.4% annualised figure reported during the January-to-March period.

"Inflation has moved somewhat closer to the Committee's longer-run objective," said the Fed.

Strong figures

Also on Wednesday, a report by private payroll processor ADP showed that the US private sector added 218,000 jobs in July.

Although official jobs figures will not be released until Friday, the figures are an encouraging sign that the US economy is finally growing at its potential.

All three US stock indexes traded higher in the wake of the figures.

Marc Chandler, global head of currency at investment firm Brown Brothers Harriman, wrote in a note to clients that overall, the US economic growth data was "strong".

However, he pointed out that as a result of revisions to economic data going back to 1999, "it now appears the US economy grew more slowly than previously known over the past three years."

The US recovery from the depths of the 2009 recession remains the weakest since World War Two.

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