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Investors cheer new Fed action

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Washington Post Staff Writers
Friday, November 5, 2010

The Federal Reserve's aggressive action this week to boost the economy sent stocks soaring Thursday to their highest level in two years as investors expressed renewed confidence that someone in Washington was finally giving the sluggish recovery a lift.

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The Dow Jones industrial average was up nearly 2 percent, erasing the last of the breathtaking losses that followed the failure of the investment bank Lehman Brothers in September 2008 and the resulting panic over a possible collapse of the global financial system. Other major U.S. stock indexes were also up sharply.

The Fed's decision to pump $600 billion into the economy through a massive program of Treasury bond purchases was a dramatic move at a time when the White House and Congress have been unable to muster a coherent policy for fueling the recovery and reducing a stubbornly high jobless rate.

Although voters in national elections Tuesday told pollsters that the economy was their biggest worry, the outcome of those contests left Congress less likely to adopt temporary tax breaks or spending increases to energize economic growth. With Republicans taking control of the House and Democrats retaining a slim majority in the Senate, a legislative stalemate over fiscal policy looms.

Republican leaders object to a round of stimulus spending and instead have vowed to slash more than $100 billion a year from the federal budget. That leaves the Fed and its chairman, Ben S. Bernanke, on their own in trying to jolt the economy and possibly puts them at odds with Republicans who have already accused the central bank of overreaching.

The Fed's task, which it plans to pursue with bond purchases over the next eight months, already carries significant risks for the economy, including the possibility of significantly greater inflation. Bernanke's job could become even more difficult - and unemployment even more intractable - if Congress tightens the national purse strings while the economy is still weak.

The Fed's action in effect grants Congress carte blanche to cut taxes or raise spending significantly without worrying about the impact of higher budget deficits. Deficit spending requires the government to borrow heavily, which in turn puts pressure on a broad range of interest rates. The central bank's bond purchases are designed specifically to lower interest rates, giving lawmakers the leeway they would need for fiscal stimulus.

A hard line on spending

If the Fed is offering Congress a credit card, however, Congress appears to be turning it down.

On Thursday, Senate Minority Leader Mitch McConnell (R-Ky.) repeated his party's opposition to additional government spending aimed at creating jobs. "We will loudly oppose future stimulus bills that only stimulate the deficit," he said.

He expressed an openness to cooperating with the Obama administration on additional tax cuts for businesses. "If [President Obama] wants to address spending, debt and private-sector job creation, he'll find a willing partner in House and Senate Republicans," McConnell said.

But neither party has shown any interest in Obama's first foray down that path, a September proposal to make permanent an existing tax credit for domestic research and development and to allow businesses to deduct their expenses more quickly. Nor has there been support for an idea embraced by many economists to grant employers and employees a payroll tax holiday through a temporary elimination of Social Security and Medicare taxes.

If lawmakers don't reach agreement on tax cuts, Congress is more likely to make things worse than better. About $400 billion worth of tax breaks enacted during the George W. Bush administration and part of Obama's stimulus package are set to expire Dec. 31. And it is not clear whether lawmakers will extend emergency jobless benefits past a Nov. 30 expiration date.


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