by Calculated Risk on 5/01/2013 09:32:00 PM

Last night I was asked if the FOMC would do anything bold today (the statement was released earlier today). I said it was pretty clear that the FOMC would not change policy at this meeting, but they could express more concern about inflation being too low or - if they were really feeling bold - warn about fiscal policy.

On inflation, the FOMC kept the phrase "Inflation has been running somewhat below the Committee's longer-run objective ..." so there wasn't any additional emphasis on inflation.

However, on fiscal policy, the FOMC added the phrase "fiscal policy is restraining economic growth."  This was severe criticism of short term deficit cutting. 

As we all know, the deficit is declining rapidly (probably too rapidly).

Public employment is down sharply over the last four years, and this morning the Census Bureau reported that public construction spending was at the lowest level since 2001 in real terms (and has declined for four years).   Not as much austerity as in Europe, but still too much given the high unemployment rate.

In the short term, U.S. policymakers should not be looking to cut the deficit further, instead they should be focused on unemployment (longer term deficit reduction is a different topic).  Eliminating the sequester budget cuts would be good policy since these cuts were an obvious mistake.

As Bernanke noted two months ago, the sequester budget cuts might actually lead to less deficit reduction:

"The CBO estimates that deficit-reduction policies in current law will slow the pace of real GDP growth by about 1-1/2 percentage points this year, relative to what it would have been otherwise.

A significant portion of this effect is related to the automatic spending sequestration that is scheduled to begin on March 1, which, according to the CBO’s estimates, will contribute about 0.6 percentage point to the fiscal drag on economic growth this year. Given the still-moderate underlying pace of economic growth, this additional near-term burden on the recovery is significant.

Moreover, besides having adverse effects on jobs and incomes, a slower recovery would lead to less actual deficit reduction in the short run for any given set of fiscal actions.

Unfortunately certain policymakers remain impervious to data ...

Thursday economic releases:
• At 8:30 AM ET: the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 345 thousand from 339 thousand last week.

• Also at 8:30 AM, the Trade Balance report for March from the Census Bureau. The consensus is for the U.S. trade deficit to decrease to $42.4 billion in March from $43.0 billion in February.