Fed keeps stimulus, says taxes and cuts have hurt

Washington - The Federal Reserve on Wednesday stood by its aggressive efforts to stimulate the economy and reduce unemployment. And it sent its most explicit signal to date that tax increases and spending cuts that kicked in this year are slowing the economy.

"Fiscal policy is restraining economic growth," the Fed said in a statement after a two-day policy meeting.

The Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it said it will continue to buy $85 billion a month in Treasury and mortgage bonds. The bond purchases are intended to keep long-term borrowing costs down and encourage borrowing and spending.

In its statement, the Fed made clear that it could increase or decrease its bond purchases depending on the performance of the job market and inflation.

David Jones, chief economist at DMJ Advisors, said that in saying it could increase or decrease its bond purchases, the Fed wants to show flexibility: It's ready to respond, whether the economy improves or weakens significantly.

Jones said he expects no change in the level of bond purchases until September or later this year. The Fed wants time to see whether the economy can grow fast enough to sustain improvement in the job market, he said.

Debate among Fed policymakers at the March meeting had led some economists to speculate that the Fed might scale back its bond purchases if job growth accelerated.

But several reports in recent weeks have suggested that the economy might be weakening. Employers added only 88,000 jobs in March, far fewer than the 220,000 averaged in the previous four months. And the economy grew at an annual rate of 2.5 percent in the January-March quarter.

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