Fed hints it’s concerned about impact of sequester

McClatchy NewspapersMay 2, 2013 

WASHINGTON — The Federal Reserve, in a carefully worded shift in language, signaled new concern Wednesday that constraints on federal spending are slowing the economy.

The rate-setting Federal Open Market Committee concluded its May meeting by continuing to keep near zero its benchmark federal funds rate, an overnight rate that banks charge one another that influences the costs of borrowing for consumers and businesses alike.

But the real news was in the parsing of Wednesday’s statement from the committee. It was nearly identical to the one issued at the conclusion of its last meeting March 20 but for a slight yet important wording change that indicated the budget sequester and restoration of the full payroll tax now are holding back an anemic recovery.

“Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy is restraining economic growth,” the Federal Open Market Committee’s statement said.

That was almost identical to the March wording, except that back then, the Fed said that “fiscal policy has become somewhat more constrictive.”

It means that by the Fed’s read of the latest economic indicators, actions taken by Congress and White House — or not taken, in the case of failing to reach a budget compromise and allowing automatic cuts to begin on March 1 — are harming the economy and the Fed’s efforts to jumpstart it.

Another subtle change in the Fed’s language noted that labor market conditions have shown some improvement “in recent months, on balance, but the unemployment rate remains elevated.” The prior statement did not include the “on balance” reference.

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