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Sentiment drives cycles, policy: San Francisco Fed

CHICAGO (Reuters) - Business and consumer confidence is a key driver of future economic performance, and a bout of pessimism signals continued easy monetary policy, a researcher at the San Francisco Federal Reserve said Monday.

Optimism about economic prospects about a year ahead fuels economic pick-ups today, Sylvain Leduc wrote in the latest San Francisco Fed Economic Letter. An increase in confidence is usually followed by tighter monetary policy, as the central bank seeks to tamp down the boom, he wrote.

Conversely, pessimism feeds economic weakness and falling inflation, and "monetary policy remains accommodative when weakness in confidence becomes entrenched," he wrote.

With U.S. consumer confidence now near historically low levels, the research may add to the view that the Fed's latest round of monetary policy easing is unlikely to be short-lived.

The U.S. central bank earlier this month began pumping an additional $600 billion into the economy to counter high unemployment and uncomfortably low inflation.

(Reporting by Ann Saphir; Editing by Leslie Adler)

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