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What will the Fed do next?

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All eyes will be on the U.S. Federal Reserve this week as investors wait to see whether the central bank will take more steps to boost the country’s economy in the face of slowing economic growth.

On Tuesday, the Federal Reserve’s Open Market Committee kicks off a two-day meeting to decide its next move, particularly another round of bond-buying -- dubbed “Quantitative Easing” (QE) by investors.

Many investors have already thrown their weight behind more Fed action, after chairman Ben Bernanke recently testified to Congress that the central bank was weighing new measures to boost the economy.

“There’s a 40-percent probability they’ll deliver something this week,” Derek Holt, vice president of economics at Scotiabank, tells BNN. “The higher odds are that they’ll do something at the September meeting.”

Holt says that the recent slowdown in the U.S. labour market and weak 1.5-percent annual GDP growth in the second quarter are both catalysts to pushing the Fed into action.

And while skeptics of more Fed action say it could spur inflation, Holt believes the central bank is unconcerned.

He says that while the most commonly used inflation measure -- the Consumer Price Index (CPI) -- is running at 1.7 percent, the Fed focuses more on another measure of inflation, known as the headline price deflator for total personal consumption expenditures (PCE).

“The [PCE] is running at about 1.5 percent year-over-year right now and the core measure that strips out food and energy is running at about 1.8 percent, so it’s materially better than CPI,” he says. “So the Fed can say ‘look inflation is reasonably well behaved -- it’s not signaling deflation risks, but it’s not a worry at the same time, it can allow us to apply stimulus in order to address the downside risks to growth.’”

He says the U.S is “years away” from the risk of experiencing high inflation, given the size of excess capacity that remains economy.

Holt estimates that the Fed would have to buy “$400 billion worth of purchases and a little bit more skewed to mortgage securities this time around," in order to have a measurable impact on the economy.

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