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Federal Reserve chairman Ben Bernanke arrives for a family photo of finance ministers and central bank governors following the G20 meeting at the 2013 World Bank/IMF Spring meetings in Washington on April 19, 2013.

The Federal Reserve made it clear in describing the U.S. economy today that any fault for this year’s sluggish expansion lies outside the central bank.

“Fiscal policy is restraining economic growth,” the Federal Open Market Committee said, with a more direct message than in March when tax and spending policy was described as “somewhat more restrictive.”

Fed Chairman Ben S. Bernanke has repeatedly said that, while Congress needs to make fiscal policy sustainable over the long run, too much tightening right away is harmful. “There is a sense in which monetary and fiscal policy are working at cross-purposes,” Bernanke said in congressional testimony in February.

The FOMC’s bluntness is “very unusual,” said John Silvia, chief economist at Wells Fargo Securities LLC in Charlotte, North Carolina, and former chief economist for the Senate Banking Committee. That message “reflects disappointment from Bernanke’s point of view, that there’s a lack of a coherent fiscal policy.”

“The characterization of fiscal policy has gone up one alert level,” agreed Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., in a report today.

Automatic federal spending cuts known as sequestration took effect on March 1. If no action is taken by Congress, spending will be reduced by $85 billion this year and $1.2 trillion over nine years. Consumers are also contending with a 2 percentage point increase in the payroll tax that took effect in January.

Federal Open Market Committee statement: go.usa.gov/Tmb5 #FOMC

— Federal Reserve (@federalreserve) May 1, 2013

Original post is Fed on U.S. Growth: Don’t Blame Us by Political Capital.

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Cypriots during a protest against an EU bailout deal outside the parliament in Nicosia on March 18, 2013.

More than half a century ago, the Federal Reserve opposed the idea of a tax on bank deposits similar to the one Cyprus has imposed.

It wasn’t the threat of bank runs that was the problem so much as fairness.

In the Federal Reserve Bulletin of November 1941, the central bank wrote that a bank tax “is not in accord with one of the fundamental principles of taxation in a democracy, namely, that taxes should be imposed in accordance with ability to pay.”

A small-businessperson, for example, might be forced to pay more because of large deposits reflecting the volume of his business rather than his profits, the Fed said. His tax might exceed that of a wealthier individual whose deposits were just salary and dividends.

A deposit tax therefore would be “undesirable” and “not consistent with the principle that the well-to-do should contribute a larger share of their incomes than those in less comfortable circumstances.”

Finally, a “technical consideration” was that some people could probably evade the tax by avoiding depositing money.

The full Fed letter is located on the St. Louis Fed’s archive of research, which preserves and gives access to historical economic and banking policy documents.

Original post is Fed Opposed Cyprus-Like Bank Tax — in 1941 by Political Capital.

Photograph by Scott Eells/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve, speaks to the Economic Club of New York on Nov. 20, 2012.

The latest inflation reports tied to consumer spending give Federal Reserve Chairman Ben Bernanke a green light to consider stepping up asset purchases, or quantitative easing.

Today’s Commerce Department report showed that a measure of prices tied to spending advanced 1.7 percent in October from the same month last year, less than the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the price gauge increased 1.6 percent from a year earlier.

“Some Fed members think they should keep easing one way or another unless the” measure of inflation tied to expenditures “rises above 2.5 percent,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“One thing for certain is that inflation is dead,” Rupkey said. “The slower growth picture right now makes the case for the Fed replacing the expiring $45 billion purchases side of QE Twist with outright purchases of Treasuries, across the curve, when it meets” Dec. 11-12.

The central bank each month is swapping $45 billion in short-term Treasuries for longer-term debt in a program called Operation Twist scheduled to end in December. A number of Fed officials have said monthly purchases of bonds may be expanded next year after Twist ends, according to minutes of their Oct. 23-24 meeting.

Jim O’Sullivan, chief U.S. economist with High Frequency Economics, Ltd. in Valhalla, New York, said today’s benign inflation report may help on that front.

“The tameness in inflation, combined with contained inflation expectations, increases the likelihood that Fed officials will expand QE3 to include Treasuries when Operation Twist concludes at year-end,” he said.

Original post is Bernanke’s Green Light for Easing by Political Capital.

Photograph by Mario Tama/Getty Images

Traders work on the floor of the New York Stock Exchange.

Wagers on President Barack Obama ’s re-election rose last week to a 16-month peak, according to the online prediction market Intrade. At the same time, the Standard & Poor’s 500 index advanced to the highest level since 2007.

Capital Economics senior U.S. economist Paul Dales in London, who’s been tracking the correlation between stocks and politics, says that’s no coincidence. Dales published a Sept. 5 commentary titled, “Is the stock market cheering for Obama?”

Bets on Republican predecessor George W. Bush surged as well in 2004, suggesting incumbency counts more than party affiliation in the markets.

“Markets like certainty,” Dales said. “The market doesn’t really prefer one party to another. With an incumbent, you know what the policies have been and how they will deal with things.”

Stocks also tend to rise with good economic news, which benefits the president, he said.

Economists disagree on the significance of the relationship. Democratic administrations have tended to favor expansionary policies that have boosted job growth, said Harvard University economist Jeffrey Frankel, who was a member of the U.S. Council of Economic Advisers in Bill Clinton’s administration.

“This sounds like a spurious correlation” with markets responding “to well-known perceived effects of good and bad economic news,” said Stanford University economist John B. Taylor, a Treasury undersecretary in Bush’s administration and a supporter of Romney.

Whoever is right, it is good news for Obama. There was a 66 percent chance of an Obama win as of today, according to Intrade bets. Dales figures the president will win reelection so long as the S&P 500 stays over 1,200. That looks pretty certain, he says, with the index at 1465.77 on Sept. 14.

Original post is S&P 500 At 5-Year High May Be Signaling Obama Win by Political Capital.