Fed maintains asset-purchase program

RISKS::With the FOMC reiterating that tightening government spending is holding back the economy, an economist said the Fed might delay tapering until March


Fri, Nov 01, 2013 - Page 15

The US Federal Reserve kept its stimulus program in place as expected on Wednesday, 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 last month, Fed policymakers 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 (FOMC) hint at the direction of future policy, amid widespread anticipation over when it might rein in the US$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 Feb. 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 committee said, repeating observations from its last statement on Sept. 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 asset-purchase program.

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

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 fiscal year runs only through Jan. 15.

However, 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 committee said.

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 said 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 said.

With another battle looming in January, it means the Fed might hold off on the taper until March, he said.