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The Fed Plays Pass the Parcel, Blames Congress for Lousy U.S. Economy

Politics / Central Banks May 03, 2013 - 03:16 PM GMT

By: Money_Morning

Politics

Diane Alter writes: The Federal Open Market Committee (FOMC) meeting concluded today (Wednesday) with one clear message to Washington: Thanks for the lousy economy.

Central bank members cited only "moderate" expansion in economic activity and a slow improvement in the stubbornly high unemployment level.


Acknowledging the economy is moving at an unhurried pace, the FOMC members pointed an accusing finger at Capitol Hill.

"Fiscal policy is restraining economic growth," the statement read. That remark was in direct reference to a deadlocked Congress, sequestration and its far-reaching impact.

A spate of fresh economic reports back that sentiment:

■Q1 GDP showed the economy grew at an uninspiring 2.5%.
■U.S. factory activity fell to its slowest pace of 2013 last month as manufacturers curtailed hiring and slashed stockpiles.
■And the private sector added a measly 119,000 in April, the fewest in seven months.

While many believed the central bank would reveal it was set to take away the fiscal punch bowl, for now drinks are still on the Fed. Team Bernanke announced it will continue with its $85 billon a month asset purchases and keep interest rates near zero.

"The talk of tapering has not only been pushed to the back burner, but pushed off the stove altogether," Michael Woolfolf, senior currency strategist at BNY Mellon told Reuters. "It's not something we're likely to see until 2014."

Highlights from the FOMC Meeting
For the first time, the Fed directly said it could alter monetary measure in either direction in response to economic indicators. Previously, the Fed had said it would simply continue to monitor the current state of accommodation.

Kansas City Fed President Esther George was the sole dissenter. Citing mounting concerns about financial imbalances, undue risk taking and long-term inflation risks, George cast the only vote against continuing the bank's easy money measures.

The central bank noted continued progress in the housing market, but warned of downside risks to their economic outlook.

Signs suggest a slowdown in inflation, but the Fed says longer-term inflation expectations remain stable.

The Fed remains "prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes."

The statement read:

"Information received since the Federal Open Market Committee met in March suggests that economic activity has been expanding at a moderate pace. Labor market conditions have shown some improvement in recent months, on balance, but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer term inflation expectations have remained stable. The Committee will continue its purchases of Treasury and agency mortgage backed securities and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability."

Reaction to Fed Meeting Muted
Stock markets have soared amid the Fed's flood of money into the economy. Since the start of the year, indexes have hit records on numerous occasions.

"The Fed looks at the stock market as a gauge of their success and boy does it look like QE is working. Housing also supports that QE is working," Peter Tchir, founder of TF Market Advisors wrote in a note to clients.

All three indexes, starting May on a down note, were lower heading into the meeting. Reaction following was muted. The Dow ended down 137.25, or 0.92%, at 14,702.56. The Standard & Poor's 500 Index slumped 14.82, or 0.93%, at 1,582.75. The Nasdaq lost 29.66, or 0.89%, at 3,299.13.

Precious metals also traded lower.

While the Fed gave no timeframe as to when it will wind down its gold and silver friendly quantitative easing program, comments that inflation remains tame weighed on metals. Gold finished down $21.30 at $1,456.25, and silver ended lower by $0.44 at $23.74 an ounce.

For more on the Fed and the U.S. economy, check out this article from Money Morning Chief Investment Strategist Keith Fitz-Gerald: Do We Really Need the Federal Reserve?

Source :http://moneymorning.com/2013/05/01/fomc-meeting-message-dont-blame-us-for-sluggish-economy/

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