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US Federal Reserve makes another cut to economic stimulus program -

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TANYA NOLAN: The head of the US Federal Reserve has announced another scaling back of efforts to stimulate the US economy.

Federal Reserve chairwoman Janet Yellen says there are still good signs of economic recovery, despite downgrading the country's growth forecast for this year.

But Janet Yellen says the sluggishness is only temporary.

Business reporter Pat McGrath.

PAT MCGRATH: Janet Yellen emerged from the US Federal Reserve's regular two day meeting armed with more than one good reason for adjusting the monetary policy levers for the US economy.

JANET YELLEN: To these policy actions reflect the committee's assessment that the economy is continuing to make progress toward our objectives of maximum employment and price stability.

PAT MCGRATH: On one of the most important measures, the US is much better health than it was just a few months ago.

JANET YELLEN: In the labour market, conditions have improved further. The unemployment rate at 6.3 per cent is four-tenths lower than at the time of our March meeting.

PAT MCGRATH: That means the US employment rate is just 0.5 per cent high than Australia's jobless rate.

But the world's most powerful central banker says that's still too high and probably reflects the fact that many people have given up looking for work and are no longer counted in the numbers.

Nonetheless, the outlook for the months ahead is slightly more positive.

JANET YELLEN: The central tendency of the unemployment rate projections is slightly lower than in the March projections and now stands at 6.0 to 6.1 per cent at the end of this year.

PAT MCGRATH: But even if unemployment continues to fall, it's not expected to lead the country's overall economic growth out of the sluggish period recorded in the first few months of this year.

On an annualised basis, the US economy actually shrank in the first quarter of the year as bad weather dampened economic activity.

And so the US Fed has been left with no choice but to factor that week quarter into its forecast for the entire year.

It's expecting growth of between 2.1 and 2.3 per cent this year.

JANET YELLEN: Although real GDP declined in the first quarter, this decline appears to have resulted mainly from transitory factors. Private domestic final demand, that is spending by domestic households and businesses, continued to expand in the first quarter and the limited set of indicators of spending in production in the second quarter have picked up.

PAT MCGRATH: That pick up help to encourage the Fed to continue scaling back the money printing program it began in 2012.

At its peak, the so-called quantitative easing program saw the Fed creating US$85 billion a month to buy government debt and mortgage bonds in an effort to keep cash flowing in the economy.

It's been slowly wound down and from next month will be scaled back to US$35 billion.

Westpac economist Elliot Clarke says the latest cut was widely anticipated.

ELLIOT CLARKE: The tapering process about reducing the amount of additional equity prior to markets. The Fed hasn't gone to the point where it's actually going to be taking liquidity away from markets. So in that sense, it has been still supportive of global financial conditions.

PAT MCGRATH: But Elliot Clarke thinks the Fed is still some way off lifting interest rates.

In the US the official rate has been kept at just above zero since the global financial crisis.

ELLIOT CLARKE: That's kind of helped the whole situation and meant that this kind of tapering process has been perhaps quite a bit less impactful on markets than might have been expected.

PAT MCGRATH: And when do you anticipate the easing itself will completely end?

ELLIOT CLARKE: So we're looking for an end to tapering as in the market around about October and then from there, there will be a period, an extended period where we'll see rates remaining on hold. We're actually expecting that the first rate hike will come through in the second half of next year in two stages - one being sort of normalising back to 0.25 having Q3 and then the actual first basis point rate hike happing in Q4 of 2015.

From there it is going to be very much dependent on what impact short-term, the changes in the short-term interest rates - so the Fed funds rate has on longer term expectations - as to how far the Fed can actually increase that short-term rate and normalise policy.

TANYA NOLAN: That's Westpac economist Elliot Clarke.