What a Government Shut Down Means for The Fed
“It’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.” St. Louis Fed President James Bullard, one day after the Fed’s September meeting.
The Fed has been talking about tapering its $85 billion a month quantitative easing (QE) program since May. Since the Fed started talking tapering, we have been skeptical about their desire or ability to do so.
We believe the Fed will draw upon any excuse to continue QE. They may have just found their latest- The government shut down. In deciding not to taper QE in September one of the reasons given was the prospect of a government shut down and the impact it may have on the economy.
Now we have a government shut down. If the shut down continues up until the Fed meeting, the Fed would have cover not to slow its QE purchases. In addition, the Fed has another excuse; because of the government shut down, important employment data from the Bureau of Labor Statistics and the Department of Labor won’t be compiled and released for the Fed to analyze.
We wouldn’t have expected the initial jobless claims and non farm pay roll reports to show significant improvement, but we won’t get them anyway*. Without fresh data the Fed can easily claim it would not be prudent to taper QE and express its wish to wait and see, yet again.
The data that we have seen since the Fed announcement not to taper two weeks ago has not been good. Mortgage applications are down and the ADP employment report missed expectations.
It’s possible that the Fed could do a small “credibility” taper this month ($10 billion fewer U.S. Treasuries) of a nominal amount just because of a temporary lag in the amount of bonds that need to be sold by the U.S. government due to a shrinking deficit. Any taper would be small and still would keep the Fed’s monthly massive bond buying program in place.
We expect QE to be a permanent part of the economy in 2014. There are limits to how much money a central bank can print before creating a currency crisis. We don’t know how much that is, but it seems the Fed is determined to find out.
*the initial jobless claim report was issued from state data but the non farm payroll jobs data will not be released during the government shut down