The Herald Bulletin

Morning Update

Breaking News

March 20, 2013

Fed stands by stimulus, sees stronger US economy

(Continued)

WASHINGTON —

Though the Fed's low interest-rate policies are intended to boost borrowing, spending and stock prices, they also hurt millions of retirees and others who depend on income from savings.

"Things are not going to get better for savers," said Greg McBride, senior financial analyst at Bankrate.com. "Rates are going to stay low for borrowers, and the Fed's accommodation will continue to be a positive for the stock market. Right now, the market is addicted to Fed stimulus."

The economy slowed to an annual growth rate of just 0.1 percent in the October-December quarter, a near-stall that was due mainly to temporary factors that have largely faded. Economists think growth has rebounded in the January-March quarter to an annual rate around 2 percent or more. The most recent data support that view.

Americans spent more at retailers in February despite higher Social Security taxes that shrank most workers' paychecks. Manufacturing gained solidly in February. And employers have gone on a four-month hiring spree, adding an average of 205,000 jobs a month. In February, the unemployment rate, though still high, reached its lowest point since December 2008.

One reason for the Fed's reluctance to reduce its stimulus is the history of the past three years. In each of the three, economic prospects looked promising as the year began. Yet in each case, the economy stumbled.

In 2010, U.S. growth was hurt by turmoil from Europe's debt crisis. In 2011, a spike in gas prices and supply disruptions caused by Japan's earthquake and tsunami dampened growth. And in 2012, higher gas prices cut into consumer spending.

Though the economy has brightened this year, it still faces threats, including across-the-board government spending cuts that took effect March 1 and are expected to trigger furloughs and layoffs.

The Fed's forecasts for the economy are rosier than those issued by the Congressional Budget Office. The CBO has warned that the government spending cuts, along with the Social Security tax increase and higher taxes on top earners, could slow growth by 1.5 percentage points this year, to 1.5 percent.

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