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The Boston Globe

Business

Better economy makes Fed action more potent

No major moves expected at next policy meeting

WASHINGTON — Federal Reserve chairman Ben Bernanke and the rest of the Federal Reserve policy committee gather again this week for what is sure to be a less dramatic meeting than last month, when they unveiled a new program of bond buying to try to drive down unemployment.

But while major changes in policy will probably be scarce when the Federal Open Market Committee unveils its handiwork Wednesday afternoon, the events of the six weeks since its last big change have shown the real importance of the Fed’s new approach to policy.

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The economic data have improved since that Sept. 13 announcement. At the time of the meeting, for example, Macroeconomic Advisers (which has an economic forecasting model similar to that used internally by the Fed) estimated that third-quarter gross domestic product rose at a 1.5 percent annual rate; now it estimates that number to be 2 percent.

The unemployment rate plunged to 7.8 percent in September from 8.1 percent in August. Housing starts, retail sales, and consumer confidence numbers have all soared.

That improvement would seem to call into question the rationale for the Fed’s decision to pump $85 billion a month into the economy.

Maybe growth is stronger than Bernanke and company realized, and they were faked out by a few months of bad data.

Quite the contrary. Even leaving aside that some other indicators of the economy’s recent performance aren’t so hot (particularly measures of business investment and hiring), the uptick in growth could make the Fed’s decision even more potent.

A key part of the Fed’s new strategy last month was to announce that the Open Market Committee ‘‘expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.’’

In other words, the central bank aimed to assure the world that it would not pull away the support strut of low interest rates until the economy was well along in recovering, so long as inflation does not threaten to get much above the Fed’s 2 percent target.

It was an effort to undo a pattern that had been in place for the last three years of weak economic recovery. Whenever there has been a quarter or two of decent growth, investors have started speculating about the exit, seeing the interest rate hikes by the Fed as being just around the corner.

But now, with the new assurances from the Fed, bond markets do not seem to be as jittery as they once were.

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