Tuesday, September 23, 2014
Inquirer Daily News

Fiscal restraint straightjacketing growth

Economics in a nutshell: Nothing says it better than the Fed itself: "Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth."

Fiscal restraint straightjacketing growth

If Washington keeps doing its best to slow growth, look for rates to remain low well into next year.
If Washington keeps doing its best to slow growth, look for rates to remain low well into next year.

In a Nutshell: "Nothing says it better than the Fed itself: Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth."

Rate Decision: Fed funds rate maintained at a range between 0% and 0.25%

I mentioned that the Fed's two-day meeting would end with a reaffirmation of its willingness to keep rates low as long as necessary and that is precisely what happened. But there were a couple of comments in the statement that will open eyes. First, in the description of economic conditions, the Committee noted that the private economy is pushing ahead but it is the government that is putting roadblocks in the way. That was as clear a shot at Congress as I have seen the Fed take.

The second phrase that jumped out dealt with the purchases of securities to keep rates low. Everyone has been debating when the monetary authorities would start to moderate their purchases. Some, even on the Fed, have raised concerns that the policy could lead to elevated inflation down the road and should be slowed. Well, there was a curve ball in the statement which read as follows: "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 key word here is not reduce but increase, which came first. Basically, I view this as a warning that the Fed's concern that there continues to be "downside risks to the economic outlook" means you cannot rule out an even more aggressive policy if growth stalls. That is not something most people were expecting, though it should make equity investors happy.

The Fed set the record straight today by making it clear that there is no near-term timetable for ending its aggressive monetary stance. It will take a strong, sustainable economy that gets the unemployment rate down to and probably past 6.5% to force the FOMC's hand. If Washington keeps doing its best to slow growth, look for rates to remain low well into next year.

About this blog
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm in Bucks County. He advises companies across the country on the risks and opportunities that economic developments may have on the organization’s operating environment. An accomplished public speaker, Joel’s humor and unique ability to make economics understandable have brought him a wide following. Reach Joel at joel@naroffeconomics.com .

Joel Naroff
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