U.S. shutdown will not deter Fed from eyeing December taper


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The government shutdown sabotaged a crucial month of data and dealt a blow to the world’s largest economy but the US Federal Reserve could still begin reducing its asset purchases as early as December.
Analysts have slashed growth forecasts for the fourth quarter to 2 per cent or below with many expecting a hit of about 0.5 percentage points from the prolonged shutdown. But many said the economy would bounce back quickly with federal employees back at work.
The shutdown has left the US counting the cost to its reputation for competent economic policy, but unless there is a sustained shock to business and consumer confidence from further fiscal warfare, the effects on growth in 2014 and Fed policy will be small.
Bond markets judged an early “tapering” of asset purchases from $85bn-a-month was less likely as the 10-year Treasury yielded 2.60 per cent from 2.75 per cent a day earlier. The dollar was also hit hard, falling to its lowest level since February.
An October “tapering” of asset purchases is all but impossible because there will be little data for the month and what there is will be scrambled by the effects of the shutdown.
But Fed officials could still choose a small taper when they meet on December 18 if the November data show a solid cumulative improvement over September and there is enough evidence to suggest a brighter economic outlook next year.
The most direct cost of the latest flirtation with the debt ceiling is a bill for $73m of extra interest because of the spike in Treasury bill yields, according to figures compiled by the Financial Times. That is equivalent to the annual salary of every member of the House of Representatives or the cost of running the Supreme Court.
“Unfortunately while Washington’s immediate foolishness may have passed, the repercussions will be felt for some time still,” said William O’Donnell, strategist at RBS Securities.
President Barack Obamasaid “Americans have become completely fed up with Washington”. But he also mounted a strong defence of government and urged Republicans to work with Democrats to improve it, rather than bring it down. “Disagreement should not descend into dysfunction,” he said.
A successful budget conference between the House and Senate, due to end by December 13, would increase the chances of a Fed taper. The Fed will also be paying more attention to the signalling effects of any change in asset purchases, and will want to be certain that tapering is not seen as a harbinger of higher interest rates.
The chairs of the budget committees in both the House and the Senate had breakfast yesterday and were hopeful that they could succeed in reaching an agreement well in advance of the next crunch point. “We want to look for ways to find common ground to get a budget agreement,” said Paul Ryan, Republican chairman of the House budget committee and 2012 vice-presidential candidate.
“We believe there is common ground and we can show the American people that Congress can work,” said Patty Murray, the Democratic chair of the Senate budget committee.

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