Fed Sticks to Stimulus Plan, Warns Growth Hampered by Budget Cuts

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Richard Drew/AP
WASHINGTON -- The U.S. Federal Reserve stuck to its plan to buy $85 billion in bonds each month to push down borrowing costs and prop up the economy, citing risks to growth from recent budget tightening in Washington.

Describing the economy as expanding moderately in a statement that largely mirrored its March decision, Fed officials cited continued improvement in labor market conditions.

But they reiterated that unemployment is still too high for policymakers' comfort, reinforcing their desire to keep buying assets until the outlook for jobs improves substantially.

"Fiscal policy is restraining economic growth," the Fed said in its policy statement. "The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation."

Kansas City Fed President Esther George again dissented against the Fed's support for growth, due to concerns about financial imbalances and long-term inflation expectations.
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Until recently, analysts had expected the Fed to buy a total of $1 trillion in Treasury and mortgage-backed securities during its ongoing third round of quantitative easing, known as QE3, with the Fed starting to take its foot off the accelerator in the second half of the year.

Now, things are looking a bit more shaky.

"Expectations for tapering off of the Fed's outcome-based purchases have been pushed back due to recent softening in the economic data," according to a statement from the private sector Treasury Borrowing Advisory Committee released on Wednesday.

Economic growth rebounded in the first quarter after a dismal end to 2012, but the 2.5 percent annual rate of expansion fell short of economists' estimates, and forecasters are already penciling in a weaker second quarter.

The housing market continues to show signs of strength, with home prices posting their biggest yearly gain since 2006, the year the market began a historic slide that snowballed into a global financial crisis.

However, the industrial sector isn't quite as perky, with a report on Wednesday showing national factory activity barely grew in April.

And the job market, the focus of much of the Fed's efforts, remains sickly. U.S. employers added only 88,000 workers to their payrolls in March and data on Wednesday suggested continued weakness in private-sector employment.

At the same time, inflation has steadily been coming down. The Fed's preferred measure of core inflation, which excludes more volatile food and energy costs, rose just 1.1 percent in the year to March. Overall inflation was up just 1 percent, the smallest gain in 3½ years.

The Fed targets inflation of 2 percent.

Checking the Toolkit

In response to a deep financial crisis and recession, the Fed cut overnight interest rates to effectively zero in late 2008. It has also bought over $2.5 trillion in assets, more than tripling its balance sheet, to keep long-term rates low.

If the economy's fortunes don't improve, the central bank may well look for fresh ways to boost its support to the economy, and increasing the amount of assets it is buying is just one option.

The Fed could announce an intent to hold the bonds it has bought until maturity instead of selling them when the time comes to tighten monetary policy. Fed Chairman Ben Bernanke has already raised this as a possibility.

Policymakers could also set a lower unemployment threshold to signal when the time might be ripe to finally raise rates. Currently, the threshold stands at 6.5 percent, provided inflation doesn't threaten to breach 2.5 percent.

Research suggests such "forward guidance" about the future path of interest rates can have a strong impact on current borrowing costs, and one Fed official -- Narayana Kocherlakota, president of the Minneapolis Federal Reserve Bank -- has already suggested lowering the threshold to give the economy a boost.

10 Reasons Why You're Not Feeling Better About the Economy
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Fed Sticks to Stimulus Plan, Warns Growth Hampered by Budget Cuts

Nationally, the average gas price hit a recent high of $3.74 per gallon, nearly $0.50 higher than it was on Jan. 1. According to website GasBuddy.com, that's about a 14 percent increase since the start of the year.

The start of the new year also marked the end of the temporary 2 percentage point tax break on Social Security contributions. Once that part of President Obama's stimulus package expired, your paychecks went back to being 2 percent smaller. For the average family, that adds up to about $1,000 a year.

That same "average family," by the way, already earns only about $50,000 a year today. And according to CNN, that's about $4,000 less than you were earning in 2000.

A disconcerting report from Sallie Mae last week showed that about one-third of Americans working toward retirement are having to raid their retirement savings to pay for their kids' college educations.

According to a poll commissioned by Bankrate.com (RATE) in February, only 55 percent of Americans have enough money tucked away in their savings accounts and "emergency funds" to cover the amounts owed on their credit cards.

That Bankrate poll also revealed that among women in particular, 51 percent actually owe more on their credit cards than they have cash in the bank. Digging deeper into the data, Bankrate reported that while high earners are doing well, and generally flush, most people (59 percent) who earn less than $30,000 annually owe more on their cards than they have in savings. And these are the people least able to afford the high cost of credit card interest.

Speaking of earnings -- and jobs -- the same unemployment report that set Wall Street to cheering Friday can be looked at from a glass half empty perspective as well. The new, lower unemployment level of 7.7 percent is the best number we've seen since the Great Recession ended. However, The Wall Street Journal points out that 7.7 percent is very close to the worst unemployment ever got (7.8 percent) in the 1991 recession. Our best number in years is within a whisker of the worst they faced back then.

The overall workforce participation rate -- the percentage of Americans currently earning wages at all -- currently stands at just 63.5 percent. According to the Bureau of Labor Statistics, that's much worse than what we saw in the 1991 recession. It's the lowest we've seen since the recession that hit during the Carter administration.

Little wonder, then, that according to the Bankrate survey, people are increasingly concerned about "job security." Friday's unemployment report may suggest that the jobs market is on the mend, but most people (59 percent) say they feel no more or less  confident in their employment situation today than they did a year ago. Among those polled whose opinions have changed, 23 percent said they feel "less secure today" than they did a year ago, versus 19 percent who feel more secure.

That doesn't exactly jibe with the story that things are getting better.

It's great news for folks who own stocks, no doubt, and according to the Journal , more than 90 percent of people earning $100,000 or more do. But what about the rest of us? Fewer than 46 percent of Americans earning less than $50,000 are invested in the stock market -- and remember, "$50,000" is the average income in America today.

So yes, It turns out for the average American, things may not be getting better at all.

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