WASHINGTON (AP) — The Federal Reserve cautioned America’s political leaders Wednesday that their policies are hurting the economy.
The Fed stood by its aggressive efforts to stimulate the economy and reduce unemployment. But it sent its clearest signal to date that tax increases and spending cuts that kicked in this year are slowing the economy.
“Fiscal policy is restraining economic growth,” the Fed said in a statement after a two-day policy meeting.
The Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it said it will continue to buy $85 billion a month in Treasury and mortgage bonds. The bond purchases are intended to keep long-term borrowing costs down and encourage borrowing and spending.
The Fed’s statement signaled its concern about a Social Security tax increase, which took effect Jan. 1, and deep government spending cuts, which began taking effect March 1. The across-the-board spending cuts took effect automatically after Congress failed to reach a budget deal.
Joel Naroff, chief economist at Naroff Economic Advisors, said he viewed the Fed’s more forceful remarks on the issue as criticism of Congress’ fiscal policies.
“The Fed noted that the private economy is pushing ahead, but it is the government that is putting roadblocks in the way,” Naroff said. “That was as clear a shot at Congress as I have seen the Fed take.”
Two years ago, Chairman Ben Bernanke argued at a Fed conference in Jackson Hole, Wyo., that Congress should do more to stimulate hiring and growth. Since then, Congress hasn’t joined the Fed in acting to stimulate growth. Instead, congressional leaders have focused on deficit reduction and allowed tax increases and spending cuts to take effect.
In its statement Wednesday, the Fed made clear that it could increase or decrease its bond purchases depending on the performance of the job market and inflation.
David Jones, chief economist at DMJ Advisors, said that in saying it could increase or decrease its bond purchases, the Fed wants to show flexibility: It’s ready to respond, whether the economy improves or weakens significantly.
“I think the Fed is in a wait-and-see mode, like the rest of us,” Jones said.
The Fed’s statement appeared to cause little response in the stock market, which fell sharply on signs of a slowdown in hiring and manufacturing and weak earnings reports from some major companies. The Dow Jones industrial average sank 138 points, or nearly 1 percent.
Wednesday’s reports included:
>> The Institute for Supply Management said that its index of manufacturing activity slipped to 50.7 last month. That’s down from 51.3 in March and the slowest pace this year. A reading above 50 indicates expansion. A measure of hiring fell sharply to 50.2, the lowest level since November.
>> A private survey showed U.S. companies added 119,000 jobs in April, the fewest in seven months. The report from payroll processor ADP also said that hiring in March was slower than first thought: the survey shows 131,000 added, down from an initial estimate of 158,000.
>> Construction spending fell 1.7 percent in March from February, the Commerce Department reported. It marked the second decline in three months.