Last month’s embarrassing spectacle over the federal government shutdown and the debt ceiling has further soured the nation on our political representatives in Washington, DC.
A new Wall Street Journal/NBC News poll found that the following hit new lows in approval ratings: the Republican Party, President Obama, House Speaker John Boehner, Senate Minority Leader Mitch McConnell, Senate Majority Leader Harry Reid, optimism about the US system of government and the percentage of respondents who said their congressional representatives deserve re-election.
During the month of October, however, the Standard & Poor’s 500 jumped 4.5 percent, to a new all-time high. Some say that dichotomy represents complacency. But maybe it’s another step away from irrational fears of an imminent economic and financial-market calamity.
Maybe we can even thank the political incompetents. One of the reasons the Federal Reserve cited in its September decision not to change its monetary policy was uncertainty over what would happen in October concerning the partial government shutdown and debt-ceiling debate, and their impact on the economy.
The Federal Reserve, as expected, said again on Wednesday that it will continue its dual monetary policy of buying $85 billion per month in US Treasury and mortgage securities while keeping the short-term interest rates it controls near zero.
Short-term rates have stayed at that depressed level for almost five years now, the longest stretch of unchanged rates in post-World War II history.
It’s debatable how effective the asset purchases have been for the real economy, given ongoing high unemployment and low inflation. But Congress and the White House have done little via fiscal policy.
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In any event, it’s undeniable that the purchases have fueled higher prices of financial assets. Hence the obsession over when and how the Fed will start to taper.
The surprise, if any, in this week’s announcement was a hint that the Fed could start to cut back on those bond purchases at its December meeting. But that seems highly unrealistic based on (1) how the economy is doing and (2) the Fed’s own guidelines for starting to taper, which it set forth last May.
All told, the economy has consistently fallen short of the Fed’s own projections, not only in 2013 but also over the last three years.
Nevertheless, the Fed this week maintained its overly optimistic assessment of “growing underlying strength in the broader economy.” It said that jobs availability is improving and that it expects inflation to rebound. Yet the Fed decided to await more evidence that “progress will be sustained before adjusting the pace of its purchases.”
But at least three major factors argue against a December tapering.
For one thing, job growth has slowed recently, with average monthly job gains now falling below 150,000, from over 200,000 earlier this year. The percentage of adults with jobs remains at roughly its post-recession low. The unemployment rate has fallen primarily because fewer people are looking for jobs.
Another impediment to tapering is that inflation remains subdued. September’s 0.2 percent rise in the consumer price index and 0.1 percent uptick in the core CPI (excluding food and energy costs) brought the year-over-year increases to 1.2 percent and 1.7 percent respectively.
The Fed’s long-stated goal is to increase inflation to 2 percent. But even the Fed’s own preferred inflation measure, personal consumption expenditures, has stayed below 2 percent since March 2012.
Strike #3 against a December tapering is a likely rerun of the October Washington show early next year. The October process merely delayed a real solution yet again. New deadlines loom in January for the budget and February for the debt ceiling, with recurring negative implications for the economy.
The Fed probably needs to see more improvement in the labor market and evidence of some acceleration in the economy. That could result in more confidence that a taper won’t lead to a jump in interest rates and tightening financial conditions, as occurred this past summer.
Our view is that no tapering is likely until at least the Fed’s March 18-19, 2014 meeting. This would be the first with current Fed vice-chairwoman Janet Yellen at the helm as chairman Ben Bernanke’s successor.
Yellen faces the confirmation hearing for her nomination before the Senate Banking Committee in mid-November. Three Republican senators have threatened to delay a vote on her confirmation, which she will win when it occurs. At the least, she’ll be asked questions about the Fed’s bond-buying program and other issues that may shed light on future policy.
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