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Fed puts fiscal slowdown blame on political policies

WASHINGTON — The Federal Reserve cautioned America's political leaders Wednesday that their policies are hurting the economy.

The Fed stood by its aggressive efforts to stimulate the economy and reduce unemployment. But it sent its clearest signal to date that tax increases and spending cuts that kicked in this year are slowing the economy.

"Fiscal policy is restraining economic growth," the Fed said in a statement after a two-day policy meeting.

The Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it said it will continue to buy $85 billion a month in Treasury and mortgage bonds. The bond purchases are intended to keep long-term borrowing costs down and encourage borrowing and spending.

The minutes of the previous policy meeting in March showed that many Fed officials were open to reducing the bond purchases before year's end, as long as the economy improved. But Wednesday's statement indicated that Fed officials are also open to expanding the bond buying if the economy needs it.

The Fed's statement signaled its concern about a Social Security tax increase, which took effect Jan. 1, and deep government spending cuts, which began taking effect March 1. The across-the-board spending cuts took effect automatically after Congress failed to reach a budget deal.

Joel Naroff, chief economist at Naroff Economic Advisors, said he viewed the Fed's more forceful remarks on the issue as criticism of Congress' fiscal policies.

"The Fed noted that the private economy is pushing ahead, but it is the government that is putting roadblocks in the way," Naroff said. "That was as clear a shot at Congress as I have seen the Fed take."

Two years ago, Chairman Ben Bernanke argued at a Fed conference in Jackson Hole, Wyo., that Congress should do more to stimulate hiring and growth. Since then, Congress hasn't joined the Fed in trying to stimulate growth. Instead, congressional leaders have focused on deficit reduction and allowed tax increases and spending cuts to take effect.

In its statement Wednesday, the Fed made clear that it could increase or decrease its bond purchases depending on the performance of the job market and inflation.

Debate among Fed policymakers at their previous meeting in March had led some economists to speculate that the Fed might scale back its bond purchases if job growth accelerated.

But the economy grew at an annual rate of 2.5 percent in the January-March quarter — a decent growth rate but one that's expected to weaken in coming months because of the higher Social Security taxes and federal spending cuts.

At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March. Low inflation gives the Fed room to keep interest rates low without igniting price increases.

The Fed's efforts to drive down unemployment and raise inflation to its target rate mean it isn't meeting either of its dual mandates: to maximize employment and maintain price stability. That makes it more likely that the Fed will maintain its current level of bond purchases until the end of the year or later.

Economic reports

Here is a summary of key economic reports released Wednesday:

• Spending on U.S. construction projects fell in March as the biggest drop in government projects in more than a decade overwhelmed strength in home building. The Commerce Department says construction spending fell 1.7 percent in March, compared with February. It marked the second decline in the past three months.

• U.S. factory activity expanded at a slower pace in April, held back by weaker hiring and less company stockpiling. The Institute for Supply Management said Wednesday that its index of manufacturing activity slipped to 50.7 last month. That's down from 51.3 in March and the slowest pace this year. A reading above 50 indicates expansion.

• A survey shows U.S. companies added the fewest jobs in seven months, indicating that government spending cuts and higher taxes may be weighing on the economy. Payroll processor ADP says private employers added just 119,000 jobs last month. And March's hiring was slower than first thought: The survey shows just 131,000 added, down from an initial estimate of 158,000.

Fed puts fiscal slowdown blame on political policies 05/01/13 [Last modified: Thursday, May 2, 2013 12:08am]

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