The Federal Reserve last night cut its growth forecast for the US and warned inflation is higher than expected, while hinting QE2 is on track to finish in June as planned.
Ben Bernanke, the chairman of the Fed, said growth was weaker than expected in the first three months of the year. As a result, he said expected growth for 2011 would now be between 3.1% and 3.3%, down from the previous forecast of 3.4% to 3.9%.
The fall in GDP came as Bernanke raised inflation expectations steeply to between 2.1% and 2.8%, up from 1.3% to 1.7%.
He said annual growth would be lower largely due to weaker growth in the first quarter, as lower defence spending, weaker exports, and a weaker construction sector impacted the figure. It is expected to come in under 2% on an annualised basis but have not yet been published.
The Fed also left rates at the current historic low of 0%-0.25% while adding QE2 - due to finish in June with $600bn of asset purchases - would end as expected. He said further stimulus was unlikely because of rising inflation.
In reaction to the Fed announcement, US markets moved higher, with the Dow closing up 95.6 points, or 0.8%, at 12,690.96.
The dollar continued to take a beating as a result, and is now worth $1.4841 against the euro. It also lost ground against the pound, climbing to $1.6713.
The dollar is now firmly on track to hit record lows, commentators said.
Meanwhile Treasury yields were steady, with the yield on 30-year bills remaining at 4.44%.
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