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Boehner Will Propose Short-Term Bill to Avert Government Shutdown but Will Maintain “Sequester”

As everybody knows, Republicans and Democrats had been expected to clash in September over funding for federal operations, ahead of the Oct. 1 (start of the new fiscal year). In a context where public finances are improving significantly, Democrats seem ready to avoid budget cuts or even increase spending in some areas while Republicans still want to limit expenses.


On a conference call Thursday evening with GOP lawmakers, House Speaker John A. Boehner said it was his “intent to move quickly” when lawmakers return to Washington in September to propose a short-term spending bill that keeps the government running for 60 to 75 days and therefore avert a “government shutdown”. In this context, lawmakers could defer the toughest budget issues to later in the fall, when lawmakers should face a deadline to raise the debt ceiling, according to CBO estimates. Yet, this budget bill will maintain sharp automatic spending cuts ($109 billion) which should entry into force from October 1st.


More from Washington Post:


House Speaker John A. Boehner said Thursday that he plans to avert a government shutdown at the end of September by passing a “short-term” budget bill that maintains sharp automatic spending cuts, known as the sequester.
“Our message will remain clear,” Boehner said. “Until the president agrees to better cuts and reforms that help grow the economy and put us on path to a balanced budget, his sequester — the sequester he himself proposed, insisted on and signed into law — stays in place.”

Consensus Expects “Tapering” in September: I Still Disagree

According to a growing number of economists surveyed by Bloomberg News, Fed will trim its asset purchases program in September.


More from Bloomberg:


Federal Reserve Chairman Ben S. Bernanke in September will trim the Fed’s monthly bond buying to $65 billion from the current pace of $85 billion, according to a growing number of economists surveyed by Bloomberg News.
Half of economists held that view in the July 18-22 survey, up from 44 percent in last month’s poll.
None of the 54 economists surveyed expects the Federal Open Market Committee to begin paring its purchases at its meeting scheduled for July 30-31. In its first trim, the FOMC will probably cut monthly bond buying by $20 billion, with purchases divided between $35 billion in Treasuries and $30 billion in mortgage-backed securities, according to the median estimate of economists.

In my opinion, the Fed will not cut the pace of its purchases at least until December for several reasons:
1/ The last FOMC Minutes suggest that:
- Before “tapering” Fed members need to reduce uncertainty about how the Committee might adjust its purchases in response to economic developments. As an illustration, several participants pointed to the challenge of making it clear that policymakers necessarily weigh a broad range of economic variables and longer-run economic trends in assessing the outlook. Moreover, some suggested providing forward guidance about asset purchases based on numerical values for one or more economic variables. In this context, Bernanke should detail his plan during a meeting followed by a conference and the next one is in September. I will not taper before explaining clearly the rules of the game.
- Many Fed members believe that further improvement of the labour market situation is necessary before it would be appropriate to cut the pace of asset purchases. The fact is that even if the headline (nonfarm payrolls) improves, that’s not the case for qualitative indicators (underemployment rate, long-term unemployed, full-time jobs…). Moreover, if the recent rise of participation rate continues, the unemployment will stagnate around 7.5%.
2/ Despite a spike in CPI and PPI in June due to energy prices, inflation is low and will remain contained in the medium term.
3/ President Barack Obama will confront lawmakers (after a long August holiday) on a daunting list of decisions affecting the economy. One of the most critical is raising the government’s debt ceiling, allowing it to pay bills already incurred. While a shrinking federal deficit has eased pressure, the limit will be hit sometime between October and November according to CBO. Moreover, Automatic, across-the-board budget cuts of $109 billion loom with the new government fiscal year, which begins Oct. 1 and the “continuing resolution” should be extended to avoid a government shutdown (deadline at the end of September).The White House wants to end automatic cuts but it will face Republican-controlled House which has shown little inclination to take up a compromise to avoid them. As a consequence, there will be a lot of uncertainties concerning fiscal issues and the Fed will try to stabilize economy.
4/ It is likely that growth could be below Fed’s expectations as economists revised downward their estimates for Q2 (1.5% vs 1.9% prior) and they always seem optimistic regarding the last data on inventories.