The Herald Bulletin

Evening Update

Nation & World

May 1, 2013

Fed keeps stimulus, says taxes and cuts have hurt

(Continued)

WASHINGTON —

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.

Jones said he expects no change in the level of bond purchases until September or later. The Fed wants time to see whether the economy can grow fast enough to drive sustained improvement in the job market, he 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.

Debate among Fed policymakers at their previous meeting in March had led some economists to speculate that the Fed might scale back its bond purchases if job growth accelerated.

But several reports in recent weeks have suggested that the economy might be weakening. Employers added only 88,000 jobs in March, far fewer than the 220,000 averaged in the previous four months. On Friday, economists expect the government to report that employers added about 160,000 jobs in April.

And the economy grew at an annual rate of 2.5 percent in the January-March quarter — a decent growth rate but one that's expected to weaken in coming months because of the higher Social Security taxes and federal spending cuts.

At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March. Low inflation gives the Fed room to keep interest rates low without igniting price increases.

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