Loose monetary policy needed to counter Washington gridlock: Fed officials

Thu Oct 3, 2013 11:53pm EDT
 
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By Deena Beasley and Karen Jacobs

SAN DIEGO/ATLANTA (Reuters) - U.S. monetary policy is being kept easier to help offset the harm caused by political fighting in Washington, according to two senior Federal Reserve officials who warned on Thursday of damaging consequences if the nation defaults on its debt.

Atlanta Federal Reserve Bank President Dennis Lockhart said the disquiet resulting from the budget battle "vindicated" the Fed's surprise decision not to scale back its asset purchases at its meeting last month.

The Fed's decision to keeping buying bonds at an $85 billion monthly pace startled markets that had expected the U.S. central bank to begin to wind down its ultra-easy monetary policy, sending stocks and gold prices sharply higher.

Critics of the central bank, including some Republicans now confronting President Barack Obama's Democrats over a deal to fund the government and lift the U.S. debt ceiling, have complained the Fed's loose policy risks future inflation and financial instability.

The Fed indicated last month that part of the reason it delayed action was the economic headwinds caused by the fiscal fights in Washington.

"I think we avoided a potentially very awkward situation of reducing stimulus just on the eve of what now has developed," Lockhart told reporters in Atlanta.

Gridlock between Democrats and Republican Tea Party conservatives in the U.S. House of Representatives has triggered a government shutdown this week and it could lead to default if lawmakers fail to raise the nation's borrowing limit.

The Obama administration warned earlier on Thursday that a default could have catastrophic consequences, potentially tipping the economy back into a recession as severe as the 2007-2009 downturn and rivaling the Great Depression.   Continued...

 
The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst