Fed to continue stimulus program while US economy sluggish

The Federal Reserve suggested Wednesday that it would not reduce its monthly economic stimulus measures while growth rates were perceived to be too low, unemployment too high and concerted congressional action to encourage the recovery is lacking.

In a Wednesday press release, the Fed indicated that it would continue its long-running $85 billion per month bond-purchasing program until economic conditions allowed for a reduction -- known as a "tapering" -- of the policy.

"We want to make sure that the economy has adequate support,"  Federal Reserve Chairman Ben Bernanke said in a press conference after the announcement. He said that the Fed stimulus would remain in place "until we can be comfortable that the economy is, in fact, growing the way we want it to be growing."

The intent of the Fed's policy, known as quantitative easing (QE), is to keep interest rates low in order to induce higher spending and more favorable economic growth.

The Fed's announcement Wednesday said that it would keep the program in place until unemployment, which currently stands at 7.3 percent, comes down to 6.5 percent, a level the Fed projects could happen by the end of 2014.

While the 7.3 percent rate is lower now than at any point since 2008, the rate of labor force participation is also lower, meaning that many people have stopped looking for work and are thus not counted in the overall unemployment rate.

Adding in other factors like the rising mortgage rates, the high incidence of underemployment and the stagnancy of real wages, what emerges from the Fed’s announcement is a picture of America still struggling to emerge from the shadow of recession.

But among the many reasons for the continuation of the Fed's monetary policies, experts point to the ongoing political deadlock in Washington over budgetary matters as one of the most significant.

“Most importantly, the Fed continues to worry about fiscal policy and in particular the dysfunction it sees with the Congress and the administration to come to a deal on the budget, thereby increasing the possibility of a government shutdown,” said Sherle Schwenninger, an economic expert at the New America Foundation, a Washington-based think tank.

A government shutdown, which would go into effect Oct. 1 if Congress fails to agree upon a budget, is one of two looming fiscal pitfalls facing legislators on Capitol Hill. The other is the raising of the debt ceiling, the limit at which the federal government can borrow.

According to federal statute, the limit at which the government can borrow must be sanctioned by Congress. While the U.S. has never defaulted before, the last debate over raising the limit came close enough to elicit a downgrade of U.S. credit by S&P, one of major agencies that rates the credit worthiness of the government.

In his press conference, Bernanke highlighted the challenge that ongoing fiscal problems presented, echoing the Fed's statement that the lack of action from Congress was "restraining economic growth."

He said it is "extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills."

The reaction to the Fed's announcement was enthusiastic on Wall Street, with the S&P 500 and Dow closing at record highs at the end of trading.

But the relation between Wednesday's market confidence and the real economy remains uncertain.

Focusing exclusively on the Fed in the form of monetary policy to aide economic recovery, Schwenninger said, has "some potentially worrying side effects."

"If you over rely on monetary policy, it tends to misshape or distort the economy," he said, adding that it "has a tendency to accentuate the inequalities in America society," doing "very little to help employment or real wages."

With wire services