Fed Signals It Could Increase Or Decrease Stimulus

By MARTIN CRUTSINGER

WASHINGTON (AP) â¿¿ 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 from its current 7.6 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 minutes of the previous policy meeting in March showed that many Fed officials were open to reducing the bond purchases before year's end, so long as the economy improved. But Wednesday's statement indicated that Fed officials are also open to expanding the bond buying if the economy needs it.

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."

Democrats in Congress generally agreed with the Fed's criticism while Republicans took exception.

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