"Low inflation, accommodative financial conditions and, more importantly, improving labour market conditions are likely to have boosted private consumption," said Antonio Garcia Pascual, European economist at Barclays.
Under current economic conditions, with significant unutilized resources, low inflation and highly accommodative monetary policy, contractionary fiscal policy has contractionary effects: spending cuts and tax increases reduce aggregate demand, choke job creation and dampen growth.
"Going by experience if the budget turns out to be populist, then we may see policy staying more accommodative, and which will keep inflation structurally high," said Rupa Rege Nitsure of Bank of Baroda.
Tea Partiers and libertarians blame the Fed for the housing bubble, and they fear the Fed's accommodative policies will re-ignite inflation.
The central bank is expected to maintain its general outlook of further increases in unemployment and lingering low levels of inflation, and uphold its accommodative stance on monetary policy.
"Monetary policy is currently not accommodative enough," Mr. Kocherlakota said, noting that inflation is projected to remain below the 2 percent annual pace the Fed regards as most healthy, so the central bank is failing both in its obligation to reduce unemployment and to control inflation.
"The board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy," the central bank's governor, Glenn Stevens, said in prepared remarks after the bank board's monthly meeting.
Although monetary policy from 2002 to 2006 appears to have been reasonably consistent with the Federal Reserve's mandated goals of maximum sustainable employment and price stability, we have not yet addressed the possibility that accommodative policies though perhaps appropriate for achieving medium-term inflation and output goals inadvertently contributed to the housing bubble.
But Mr. Bernanke suggested that "if economic and financial developments were to require a more rapid exit from the current highly accommodative policy" that is, if fears emerge about inflation the Fed "could increase the interest rate paid on reserves at about the same time it commences significant draining operations".
With inflation prospects subdued, there is scope for accommodative monetary policy.
