Fed rejects new action to bolster faltering economy

The Federal Reserve said Wednesday that the U.S. economy was slowing and unlikely to create nearly enough work this year for millions of jobless Americans, but Fed leaders declined to take any steps to boost growth.

Rather, the Fed said only that it would act as needed in the future to keep the economy growing.

While the prospect of future steps offered a glimmer of hope, the lack of immediate Fed action was a reminder that Washington has yet to meaningfully address one of the nation’s greatest challenges: the 13 million unemployed Americans, many of whom have gone six months or more without a job.

With the unemployment rate stuck over 8 percent, the number of people who say they want to work but cannot has again started to climb in recent months. And government inaction could exacerbate the country’s economic woes if President Obama and Congress fail to find a way to head off a series of spending cuts and tax hikes set to take effect at the start of next year.

There is no shortage of public discussion about unemployment. The economy is the top issue in the presidential campaign, and Democrats and Republicans in Congress are relentlessly arguing over who is to blame for the mammoth jobless rolls. But for various political and practical reasons, possible solutions have not been pursued.

The White House, for instance, has been pushing for new help for the long-beleaguered housing market, which continues to be a drag on economic growth. On Tuesday, however, a key federal housing regulator rejected a plan to reduce homeowner debts, saying he was trying to protect taxpayer dollars. Some economists say the nation’s debt overhang is holding back growth that could generate more jobs.

Obama and Republicans in Congress, meanwhile, have for months been unable to agree on measures to address unemployment.

The Fed has relatively greater latitude to tackle economic concerns, because it faces fewer political constraints and Fed Chairman Ben S. Bernanke has outsize sway over its policies. Twice this year, the Fed has tried to bring down interest rates slightly in an effort to spur economic activity.

On Wednesday, the Fed left two potential measures on the table. One is extending an existing pledge to keep interest rates low through at least 2014, while the other is undertaking massive bond purchases to pump hundreds of billions of dollars into the economy.

The Fed could still do either or both when it next meets in September. By then, the government would have issued jobless reports for July and August, providing further insights into the health of the economy. Fed leaders suggested they would be willing to take more “accommodative” action in the future to fuel growth.

The Fed “will closely monitor incoming information on economic and financial developments,” the central bank’s policy statement said, “and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

If upcoming reports show a significant deterioration of the economy, the Fed will probably undertake new stimulus measures. It is not clear, however, whether the Fed will consider these steps warranted if the economy continues to muddle through.

Some Fed officials worry that these steps could spur a bout of inflation, which would eat away at working-class incomes. For the moment, this concern remains theoretical; inflation is running at or below the level the Fed considers healthy.

Fed officials also are not sure how effective new efforts would be; economists are far from unified on whether the Fed has much power over the economy remaining. Bernanke has said that monetary policy is no panacea, saying Congress and the White House have to act, too.

Investors seemed unsure Wednesday of what to make of the Fed’s statement. Stock markets fell after the announcement, but only modestly, perhaps reflecting a mix of disappointment about the lack of new action and hope for more next month.

What is clear, however, is that the Fed is the only U.S. government body that can act to help the economy before the presidential election.

Obama has promoted a package of measures to stimulate the economy, but he has also said he wishes to pay for it by raising taxes on the wealthy. Republicans regard tax increases as a non-starter. The result is deadlock.

What’s more, Obama and the Republicans seem far away from a compromise that would avert the “fiscal cliff” — the series of tax hikes and deep spending cuts at the start of next year that are designed to force budget savings and bring the nation’s debt under control.

The combination of tax hikes and deep spending cuts would probably push the economy back into recession, which would make unemployment rise, many economists warn. Neither side of the aisle favors that outcome.

Substantial new efforts to help the housing market also seem unlikely. Ed DeMarco, the acting director of the Federal Housing Finance Agency, rejected a White House plan to reduce mortgage debts that administration officials projected could have helped 500,000 people. His reasoning was that it would not ultimately benefit taxpayers.

Zachary A. Goldfarb is a staff writer covering the White House, focusing on President Obama’s economic, financial and fiscal policy.
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