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Fed sees strong signals but stays course
Keeps bond-buying program in place
Question of the Day
The Federal Reserve maintained its easy money policies Wednesday, noting that federal budget cuts and the October shutdown continue to weigh on growth and as a result, the economy continues to need support.
“Fiscal policy is restraining growth,” the central bank said in a statement after a two-day meeting of its rate-setting committee, which did not specifically mention the 16-day government shutdown but alluded to it and the $85 billion of across-the-board budget cuts implemented earlier this year.
“Taking into account the extent of federal fiscal retrenchment over the past year,” the statement said, the economy is exhibiting “growing underlying strength” that has enabled it to continue growing steadily at a 2 percent or so pace despite being buffeted by two rounds of budget impasses between Congress and the White House this year.
Still, the strengthening in the underlying economy is not robust enough to justify an end to the Fed’s bond-buying program, it said. The Fed has been purchasing $85 billion a month in Treasury and mortgage-backed bonds to inject additional liquidity into financial markets in hopes of speeding the recovery.
The Fed emphasized that it will continue its easing campaign until it sees convincing signs of a self-sustaining recovery in the labor market.
“They’re awaiting a clearer picture of how the economy is faring in the face of disruptions caused by the government shutdown and budget crisis,” said Chris Williamson, economist at Markit. “It seems likely that the Fed will need to wait several months before the picture clears sufficiently.”
The Fed will want to see a pickup in employment gains and a rebound in housing activity before considering an end to its easing programs, said Harm Bandholz, economist at Unicredit Markets. It will also wait to see what happens at the beginning of next year, when Congress faces two more self-imposed fiscal deadlines for funding the government and raising the debt limit that could result in another economy-shaking political standoff, he said.
Fed Chairman Ben S. Bernanke was “clearly vindicated” when he raised worries about the budget crisis this month, he said. The shutdown and flirtation with national default sent consumer and business confidence plummeting and further slowed the economy, which was growing only tepidly even before the shutdown.
“The Fed does not want to take any gamble and is not going to withdraw some of its stimulus if there is any remaining danger that the political parties risk another standoff with adverse consequences for the economy and financial markets” in January, Mr. Bandholz said. “Our baseline scenario is that congressional Republicans, who were the clear losers of the latest standoff, won’t risk another gamble in early 2014 as we are getting closer to mid-term elections,” though nobody can be sure what will happen, he said.
Paul Edelstein, economist at IHS Global Insight, said the Fed is on hold until at least March 2014.
“The major problem is the fallout on the economy from the fiscal showdown that occurred this month, and could occur again early next year,” he said. “The Fed’s short-term objective is to protect the economic recovery from Washington headwinds.”
The Fed’s decision to stand pat, which provoked dissent from only one member of the committee, Kansas City Federal Reserve Bank President Esther L. George, was largely expected in financial markets. Major stock indexes declined moderately, with the Dow Jones Industrial Average ending down 62 points at 15,619.
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