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Business News

Cautious optimism as US economic growth exceeds expectations

Travel on the road to recovery seen as modest but significant while Fed opts to stay the course on bond programme – for now

The Federal Reserve tempered its optimism about the pace of growth in the world's largest economy yesterday, keeping its stimulus measures in place, even as new figures showed that the US had expanded at a faster than expected rate in recent months.

Figures from the Commerce Department showed that output had climbed at an annualised pace of 1.7 per cent between April and June, which was a much better result than the 1 per cent expansion that was forecast by economists.

While the positive second-quarter figure was accompanied by a downward revision to data for the first quarter, the report underscored the sense that the American economy was gathering momentum.

The Commerce Department said that the US had expanded by 1.1 per cent between January and March, compared with an earlier estimate of 1.8 per cent.

Yesterday's report also included revisions to historical data as part of a periodic overhaul of the underlying methodology.

The revised figures showed that the US grew at a pace of 2.8 per cent over 2012, compared with a previous estimate of 2.2 per cent.

However, optimism about the revision was tempered by the proviso that much of the additional growth occurred early in the year.

The overall picture was of an economy that, while it is recovering, has endured a rocky time as it emerges from the recent recession. The figures were immediately scrutinised for clues about the outlook for monetary policy, with the Fed, which is currently is buying up $85bn (£56bn) worth of mortgage-related and government bonds each month, debating a reduction in the programme. In a policy statement issued after the GDP figures, the Fed said the pace of expansion in the US over the first half of 2013 had been "modest", a shift in emphasis last month, when the central bank said the economy had been expanding at a "moderate pace."

Highlighting rising mortgage rates and low inflation as indicators that would monitor closely, the bank said it would keep its bond programme intact for now.

Previously, the Fed chairman Ben Bernanke has indicated that the Fed might begin reducing the scope of the programme later this year – a process that has become known as 'tapering' – and potentially wind it down completely around the middle of next year.

The suggestion has already caused sharp swings on markets worldwide, as investors eye the beginning of the end of a loose monetary regime in the world's largest economy.

Complicating the calculations for those on the outside is the expected change in the leadership of the Fed, with Mr Bernanke widely anticipated to step down early next year.

His deputy, Janet Yellen, and the former US Treasury Secretary, Larry Summers, are seen as frontrunners to replace Mr Bernanke. An announcement on the succession is likely to be made in the autumn.

Until then, speculation is likely to continue about how the next Fed chairman might influence policy changes, with Mr Summers having previously questioned the impact of quantitative easing.