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Fed Reports Sluggish Economic Growth

NEW YORK ( TheStreet) - The Federal Reserve's Beige Book showed weak to modest economic expansion in the central bank's twelve districts over the latter part of the summer, leaving the door open to an announcement of further Fed action in late September.

Consumer spending edged up in most of the districts while manufacturing conditions slowed in many regions. Meanwhile, "several districts... indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks," according to the report.

The labor market was "generally stable," with some districts reporting "modest employment growth." The jobs market saw some growth within the health care and energy industries.

While the Beige Book did not indicate a double-dip recession, it confirmed a sluggish U.S. economy. Stocks were little changed on the report as it did not contain new details that would give ammunition to the argument for further quantitative easing.

Ahead of the Fed's late September meeting, investors are eagerly awaiting a possible announcement of Operation Twist, where the central bank would sell short-term assets to fill its portfolio with longer-term Treasuries. Already, Fed chief Ben Bernanke's announcement last month that the Fed would lengthen its usual September meeting to two days has given investors hope that the Fed will serious considering some form of monetary easing.

The minutes of the Fed's last policy meeting revealed deep divisions between the banks members over the economic outlook and whether the Fed should take action.

Those that favor additional stimulus include Federal Reserve Bank of Chicago President Charles Evans and Boston Fed President Eric Rosengren. On the other hand, Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser have argued that more easing would lead to high inflation, among other unfavorable consequences.

Earlier today, Chicago Fed President Charles Evans said that those who think "the risk of overshooting our inflation objective... exceeds the potential benefits of speeding improvement in labor market" are "extremely, and inappropriately, asymmetric in its weighting of the Fed's dual objectives to support maximum employment and price stability."

One option for the Fed is keeping the interest rate near zero until unemployment drops "below 7.5% or even 7.0%, as long as medium-term inflation stayed below 3%," said Evans in his speech at the European Economics and Financial Center.

-- Written by Chao Deng in New York.

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