The Federal Reserve has explicitly criticised budget cuts imposed by Congress, blaming fiscal policy for holding back the US's economic recovery.
After a two-day meeting, the Federal Open Markets Committee (FOMC) said on Wednesday in a statement that despite signs of recovery "fiscal policy is restraining economic growth". The statement is the FOMC's boldest assertion to date that Washington policy is hampering the US's fragile economic recovery. It stands in marked contrast to last month's more cautious statement, which said "fiscal policy has become somewhat more restrictive".
The FOMC released its statement after two key reports suggested that recovery in the jobs market is slowing, as end of year tax hikes and budget cuts – known as sequestration – seem to take their toll.The Fed announced on Wednesday that it would keep pumping $85bn a month into the US economy, citing concerns about the impact Washington's budget cuts are having on the US recovery.
Dan Greenhaus, chief strategist at the trader BTIG, said: "They increasingly view fiscal policy as an impediment to what they've been trying to accomplish and today's statement is an outright affirmation of that view. Fiscal policy 'is' restraining growth, from the Fed's point of view. And as long as fiscal policy remains constrictive, then the Fed are likely to do more rather than less."
The Fed also left interest rates unchanged but said it would "closely monitor" economic and financial information in the coming months.
The Fed said: "Information received since the Federal Open Market Committee met in March suggests 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."
Last September, the Fed announced plans to buy $40bn a month in mortgage-backed securities, in an attempt to bolster the still fragile housing market, and another $45bn in Treasury securities.
The bond-buying programme, known as quantitative easing, is open ended and meant to bring down the cost of borrowing, in order to stimulate the economy. Economists had expected the Fed to start cutting back on the programme by the summer, at which point $1tn will have been pumped into the economy.
But recent economic news has suggested a slowdown in the US recovery. Last month's nonfarm payroll jobs figures showed the pace of hiring dropping off. The latest jobs figures are released Friday and come after ADP, a leading payroll processor, on Wednesday reported a similar slowdown in hiring in the private sector.
"The committee is 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 FOMC said in its statement.
Recently there have been sign of dissent within the FOMC about the efficacy of the programme. This month's FOMC meeting said committee member Esther George, president and chief executive of the Federal Reserve Bank of Kansas City, had voted against further QE as she was "concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations".
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