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Fed Sparks A Debate: When To Reduce Stimulus?

The Fed's "massive intervention ... has distorted the price of many financial instruments," said Sun Wong Sohn, an economist at California State University, Channel Islands. "The sooner (the Fed) can allow market forces dictate the price, the better."

â¿¿ Christopher S. Rugaber, AP Economics Writer

_____

THE CASE AGAINST SLOWING BOND BUYING

What's the hurry?

Many argue that the Fed had good reason to delay any reduction in its bond-buying program: The economy still needs the help. Economic growth and hiring remain weak. The unemployment rate remains high.

The Fed's bond purchases tend to push interest rates down, making it cheaper for consumers to buy cars and houses. Lower rates also help drive the stock market up and make Americans feel wealthier and more willing to spend. That's important in a country where consumer spending accounts for 70 percent of economic activity.

The Fed downgraded its outlook for U.S. economic growth this year and next. The job market doesn't look as strong as in the spring when the Fed raised the prospect of scaling back the bond purchases. Job growth has slowed to an average of 155,000 a month since April, down from an average 205,000 in the first four months of the year.

True, the unemployment rate has sunk to a 4½-year low of 7.3 percent. But it's fallen for the wrong reason. More people have stopped working or looking for work. Once people without a job stop looking for one, they're no longer counted as unemployed.

Their departure shrank the so-called labor force participation rate â¿¿ the percentage of adults who have jobs or are seeking one â¿¿ to 63.2 percent, the lowest since August 1978. If those who left the labor force last month had still been looking for work, the unemployment rate would have risen to 7.5 percent in August.

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