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HomeArchiveU.S. Fed stays course amid spending cuts

U.S. Fed stays course amid spending cuts

By Paul Handley | AFP

WASHINGTON, D.C. – The U.S. Federal Reserve kept its easy monetary policies in place Wednesday, saying high unemployment and the government’s sharp spending cuts remain barriers to full recovery from the 2008 crash.

The Federal Open Market Committee, the Fed’s policy board, said after a two-day meeting that U.S. economic growth had rebounded from the flat 2012 fourth quarter to a moderate pace in recent months.

But with Europe in fresh turmoil and the U.S. government slashing spending to close the fiscal deficit, the FOMC trimmed its 2013 and 2014 economic growth forecasts.

The FOMC acknowledged an improvement in the jobs market, and cut its projected unemployment rate to 6.7-7.0 percent by the end of 2014.

But Fed Chairman Ben Bernanke said that the FOMC still saw risks for the economy.

The committee “remains concerned that restrictive fiscal policies may slow economic growth and job creation in coming months,” he said at a news conference after the meeting, referring to the U.S. government’s “sequester” budget cuts that began on March 1.

In addition, he said, “at 7.7 percent, the unemployment rate remains elevated.”

He noted that higher taxes from the beginning of the year and various measures to cut spending will reduce some 1.5 percentage points from growth this year, “which, of course, is very significant. … So that is an issue for us.”

As expected, the FOMC left in place its ultra-low benchmark interest rate of 0-0.25 percent and its quantitative easing (QE) program of $85 billion a month in bond purchases, which aims at holding down longer-term interest rates.

Bernanke has repeatedly said in recent months that as long as inflation remains low and unemployment is high, the Fed needs to continue to support growth.

Despite some discussion in the FOMC’s January meeting that the QE program is increasingly risky for monetary management, Bernanke said most FOMC members had agreed that the bond purchases “continue to provide meaningful support to economic growth and job creation.”

“I think it’s very, very important that we act to address unemployment,” he told reporters.

Concerns over whether the prolonged low-rate policy was generating risky behavior again in financial markets “remain manageable,” he said.

But he stressed that the FOMC could reel in the asset purchases in the future if conditions changed.

“At this meeting, the committee judged that no adjustment was warranted,” he said.

Asked about the soaring U.S. stock markets, he said, “We don’t see at this point anything that’s out of line with historical patterns.”

The FOMC marginally cut its December growth forecast to 2.3-2.8 percent for this year and 2.9-3.4 percent in 2014.

With the outlook for inflation also still low – 1.7 percent at most this year and 2.0 percent at most in 2014 – most FOMC members expected to keep the benchmark interest rate unchanged until 2015.

Bernanke meanwhile said the U.S. economy and financial sector were not currently at danger from the crisis in Cyprus, which has sent shivers through the European economy.

“At this point we are not seeing a major risk to the U.S. financial system or the U.S. economy,” he said.

“There are a lot of uncertainties and difficulties” for Cyprus, he said, after the 10 billion euro ($13 billion) EU-IMF bailout of the island country was left hanging due to the parliament’s rejection of a heavy tax on bank deposits that was a key part of the deal.

However, “I don’t think the impact has been enormous” on markets overall, he said, pointing to the rebound Wednesday in U.S. and European markets.


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