Data did not support tapering bonds, says Federal Reserve chief

Federal Reserve Bank of Boston president Eric Rosengren, a consistent backer of record stimulus who votes on policy this year, said the Fed refrained from tapering its bond purchases last month because growth was lower than forecast and fiscal policy posed a risk to the outlook.

“Had US fiscal matters not been so problematic, and incoming data on real GDP and employment stronger, it may well have been appropriate to take some action in September,” Rosengren said. “Unfortunately, those were not the facts we faced” at a policy meeting on Sept 17-18.

The Federal open market committee surprised investors last month by maintaining its $85bn (€62.5bn) monthly pace of bond purchases. The Fed kept stimulus in place as Congress debates how to resolve the first government shutdown in 17 years and whether to raise the nation’s debt limit.

Federal budget cuts have harmed the economy, and additional reductions may cause more damage, Rosengren said.

“While some of the effects of fiscal austerity will eventually ebb, to date fiscal austerity is one reason we have yet to see growth much faster than 2%,” he said.

“Unfortunately, this remains an area of significant uncertainty, given debates in Congress” on funding the government past the Sept 30 end of the fiscal year “and potentially allowing the country to default on its debt”.

He added: “The uncertainties, not to mention the outcomes themselves, threaten to have a collateral impact on the rest of the economy.”

Day one of the first partial government shutdown since 1996 ended yesterday with no talks scheduled between the White House and Congress.

A partial government shutdown lasting a week would probably shave 0.1 percentage point from economic growth, according to Bloomberg economists.

The closing has left almost 800,000 employees on unpaid leave as offices, parks, and museums closed. It may cost the US at least $300m per day in lost output at first, according to IHS.

The shutdown comes as US budget deficits have been shrinking. The deficit in June was 4.3% of GDP, down from 10.1% in Feb 2010 and the narrowest since Nov 2008, when Barack Obama was elected to his first term.

Congress and the White House must also agree on raising the country’s $16.7 trillion debt ceiling. Treasury secretary Jacob Lew said the US has begun final extraordinary measures intended to avoid breaching the limit, which will be exhausted no later than Oct 17.

Rosengren said he “strongly and unequivocally” supported the Fed’s decision not to taper asset buying. “Fed actions are not determined by Wall Street’s expectations of what we might or should do,” he said.

“Rather, our policies need to be consistent with achieving key goals like supporting Main Street’s more rapid return to full employment” and averting too low inflation.

The Fed may remove stimulus if the economy quickens, or add “more accommodation than is currently anticipated” if the economy unexpectedly slumps.