WASHINGTON (Reuters) - The economy faces an important drag from fiscal policy and remains a long way from full health, a senior Federal Reserve official said on Thursday, warning it was premature to judge the impact of the Fed’s latest action to spur growth.
“The U.S. economy has continued to recover from the effects of the financial crisis and deep recession, though at a pace that has been disappointingly slow,” Fed Governor Sarah Bloom Raskin told the National Economists Club.
“The recovery does appear to have picked up steam in some sectors, most notably in housing ... However, federal fiscal policy remains an important source of restraint,” she said.
Washington raised taxes in January and initiated sweeping budget cuts in March to bolster its finances but the fiscal tightening is expected to crimp growth.
The Fed voted earlier this month to hold interest rates near zero and keep buying bonds at a $85 billion monthly pace, shrugging off calls from policy hawks to start tapering the program. Raskin viewed that as a premature judgment.
“Although it is still too early to assess the full effects of the most recent policy actions, available research suggests that our previous asset purchases have eased financial conditions and provided meaningful support to the economic recovery,” she said.
The Fed says it will keep buying bonds until it sees a significant improvement in the outlook for the labor market.
Some of its officials, who favor less aggression from the central bank after its unprecedented policy easing, say this is already happening.
U.S. firms created an unexpectedly robust 165,000 jobs in April and the two previous months’ readings were revised higher, encouraging optimism the nation would avoid another ‘spring swoon’ of economic weakness after winter strength.
Raskin acknowledged there had been some improvement in the data but indicated she did not find this evidence conclusive.
“I hope these indicators mean we are turning the corner on some of the painful costs associated with being unemployed or underemployed in America,” she said, noting the jobless rate remained high, while 11.7 million Americans cannot find work.
U.S. unemployment edged down one tenth of a percentage point to 7.5 percent in April, which is lofty on historic levels and well above the rate before the crisis struck.
“The increase in economic activity and the decline in the unemployment rate are, of course, welcome, but we still have a long way to go to reach what feels like a healthy economy,” she said.
Reporting By Alister Bull; Editing by Andrea Ricci