FOMC: Fed Blames Congress And Obama For Slow Economy, Pledges Continued QE

The Fed was direct in pointing out the effects of fiscal policy on economic growth, indirectly pointing the finger at Congress and President Obama - Image credit: AFP/Getty Images via @daylife

Blaming Congress for restraining economic growth, Bernanke’s Federal Reserve will march on with its ultra-accommodative monetary policy.  Quantitative easing and record low interest rates will continue to support the market and attempt to jump start an economy that is very slowly beginning to pick up, despite unemployment remaining stubbornly high.  The Fed highlighted continued progress in housing markets, but warned of downside risks to their economic outlook.
As expected, the Fed will continue to buy $40 billion a month in residential mortgage-backed securities and $45 billion in Treasuries in order to keep, and push, interest rates down in order to monetarily support the economy, the FOMC announced on Wednesday.
In their statement, FOMC participants spoke of “moderate” expansion in economic activity and continued, albeit slow, improvements in labor market conditions.  The Fed recognized the economy isn’t moving as fast as it would like, blaming Washington directly for that.
“Fiscal policy is restraining economic growth,” the FOMC statement read, referring directly to the impact of sequestration on the economy.  Indeed, economic growth remains subpar with GDP growing 2.5% in the first quarter, while the private sector added a meager 119,000 jobs in April, as my colleague Abram Brown reported.
Beyond touching on sequestration, the Fed noted that it is willing to “increase or reduce the pace of its purchases to maintain appropriate policy accommodation .”  Previously, the Fed had only said it would continue to monitor the current state accommodation, but on Wednesday it directly said it could alter them in either direction in response to economic indicators.  St. Louis Fed president James Bullard has been a proponent of varying the rate of asset purchases to reflect the level of accommodation, while in the past Bernanke has said the total size of their balance sheet, rather than its rate of change, determined the level of monetary easing.
The Bernanke Fed made no reference of disinflationary pressures which have been apparent over the past few months, as I reported here.  Beyond noting it would continue to keep rates low until the unemployment rate moved below 6.5% and inflation remained below 2.5%, the FOMC faced one dissent.  Following the lead of Thomas Hoenig, Kansas City Fed chief Esther George warned QE3 and ultra-low rates could spark higher than expected inflation.
Market reaction to the FOMC statement was relatively muted, with all three major U.S. equity indexes staying in negative territory.  The yield on 10-year Treasuries stood at 1.62% while gold was trading at $1,446.20 per ounce.  Stocks in major banks including JPMorgan Chase JPM +0.15%, Wells Fargo WFC -0.13%, and Citigroup C +1.48% also remained in the red.