After “Government Shutdown”, the Fed Will Not “Taper” Until at least December

This morning, the U.S. government began a partial shutdown for the first time in 17 years which will put as many as 800,000 federal employees out of work. Moreover, according to IHS, partial shutdown would cost U.S. at least $300 million/day in lost economic output (0.002% of real GDP) at the start.

 

More from Bloomberg:

 

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.
 
While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.

 

The impact on the economy will be minimal if the shutdown is short, however, the risk is that the debate could drag on until October 17th (Treasury deadline).

 

In this context, the Fed will maintain a very accommodative policy letting its asset purchase program unchanged at least until December meeting (December 17-18). Indeed, it is very unlikely that Fed will start “tapering” at the October meeting (October 29-30) for several reasons:
 
1/ Inflation remains particularly low and well below Fed’s target:
* PCE Core inflation and PCE inflation were revised downward in Q2 from 0.8% (QoQ Annualized) to 0.6%.
* PCE Deflator YoY WAS 1.2% in August and was revised downward in July from 1.4% to 1.2%.
* Prices for gasoline on the New York Mercantile Exchange have fallen roughly 11% in September.
 
2/ Growth will remain sluggish:
* Fiscal issues were already weighing on companies’ expectations as the BRT (Business RoundTable) third quarter CEO Economic Outlook Survey fell to its lowest level since Q4 2012.
* The latest figures suggest that Q3 GDP, which will be published on October 30, will be slightly below 2% (QoQ Annualized).

 

3/ Jobs report and other economic reports will be delayed or cancelled according to Reuters. Without figures which sow a significant improvement concerning labor market, the Fed will not “taper”.
 

The United States will stop publishing much of its economic data next week if the government shuts down, including the closely watched monthly employment report, officials said on Friday.

 

4/ Given the recent trend in inflation, growth and the fact that employment report will be delayed or cancelled, Fed members’ speeches (voters) since last FOMC suggest that “Octaper” is unlikely:
 
* On September 18 – Fed Chairman Bernanke (dove, FOMC voter) / There is no fixed calendar for tapering, it could begin this year, depending on data. – FOMC press conf
- Fed to maintain highly accommodative policy.
 
* On September 20 – Fed’s Bullard (moderate, FOMC voter) / GDP is tracking below 2%, thought it would be higher at this point – speech in New York + comments
- Removing accommodation when inflation is below target is concerning. Fed must hit inflation targets.
- Want to see a recovery in inflation before adjusting stimulus program, inflation is expected to rise over the upcoming quarters.
 
* On September 23 – Fed’s Dudley (dove, FOMC voter) / Reiterates that Fed policy will continue to be driven by incoming economic data – speech in New York City
- Fiscal uncertainty is one issue impacting the schedule for exiting QE, along with market interest rates and less good data.
 
* On September 26 – Fed’s Stein (dove, FOMC voter) / US still requires accommodative policy – speech in Frankfurt
 
* On September 27 – Fed’s Evans (dove, FOMC voter) / Needed to defend inflation from below as well as above – comments from Oslo
- Tapering could start in Oct, Dec, but could be pushed to Jan.

 
 

All Fed members’ speeches concerning QE and economic activity since the last FOMC meeting (September 17-18) are available here.