Fed maintains stimulus, says gov’t policy hits growth

WASHINGTON - Agence France-Presse

In a highly expected move, the Fed has decided to keep buying $85 billion in bonds each month. The Dow Jones industrial average was down 61 points at the end of the trading day. AFP photo

The US Federal Reserve kept its stimulus program in place as expected late Oct. 30, but reiterated the government’s fiscal policy is a drag on the economy.

In their first meeting since the government shutdown at the beginning of October, Fed policy makers made no reference to the potential impact that laying off hundreds of thousands of workers for 16 days might have had on the economy.

Nor did the Federal Open Market Committee hint at the direction of future policy, amid widespread anticipation over when it might rein in the $85 billion a month stimulus.

Instead, after a month of mostly dull and inconsistent data, much of it delayed and skewed by the shutdown, the FOMC stressed the need to see more evidence of sustained progress before taking action. After a two-day meeting, the first since Fed Vice Chair Janet Yellen was nominated by the White House to replace Chairman Ben Bernanke on February 1, the FOMC described economic activity as having “continued to expand at a moderate pace.” The panel said that household spending and business investment are still advancing, inflation remains well in check, and the labor market continues to improve.

Risks to the economy have “diminished, on net, since last fall,” the FOMC said, repeating observations from its last statement on September 18.

At the same time, unemployment remains elevated, the policymakers said, underscoring the need for continued support to the economy from its ultra-low interest rates and quantitative-easing (QE) asset-purchase program.

There was no comment on the October 1-16 shutdown, despite numerous independent analysts estimating that it took some $24 billion out of the economy and would cost it up to 0.5 percentage points from growth in the fourth quarter.

Protecting economy despite Washington

Preliminary data released in the past week suggests that consumer spending slowed and consumer and business confidence suffered as a consequence.

And there was no allusion to worries that the same show of political brinksmanship that forced the shutdown could resume in January if fresh budget talks between Republicans and Democrats again prove fruitless. The temporary budget for the current 2014 fiscal year runs only through January 15.

But the Fed policymakers did reiterate a view that Bernanke has been pressing since last year, that tightening government spending is holding back the economy’s rebound from the 2008-2009 recession. “Fiscal policy is restraining economic growth,” the FOMC said, tersely. US stocks, which hit fresh all-time highs on Tuesday, were lower Wednesday prior to the meeting, and continued to fall afterward, with the S&P 500 losing 0.49 percent.

The dollar was higher, with one euro buying $1.3730, compared with $1.3770 before the announcement. Markets have fixed on the Fed’s handling of the QE taper since May when Bernanke said that, if the economic data held up, the Fed would begin slowing the asset purchases late this year and wind them up by mid-2014.

That sent bond yields and interest rates surging, and wreaked havoc in the capital and currency markets of emerging economies around the world.

Since then, though, the FOMC has held back, amid an apparent slow spot in the economy since August and with policy battles in Washington having dimmed consumer and business confidence.

Economist Paul Edelstein of IHS Global Insight called the slightly positive Fed statement “puzzling in light of the recent fiscal turmoil and lingering risks.” At the same time, he noted, it gave no signal on reducing the bond-purchase program.

“The Fed’s short-term objective is to protect the economic recovery from Washington headwinds,” he noted.

With another battle looming in January, it means the Fed might hold off on the taper until March, according to Edelstein.

Harm Bandholz of UniCredit said that economic data could prove strong enough for the FOMC to cut asset purchases beginning in January.

At the same time, he acknowledged, “Financial markets have already pushed back taper expectations to March.”