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President Barack Obama

U.S. Lawmakers Found A Temporary Deal But Challenges Persist

Christophe Barraud


President Barack Obama signed into law a measure ending the 16-day U.S. government shutdown and extending the nation’s borrowing authority until early next year, the White House said today in a statement:


From Bloomberg:


The measure was passed by wide margins in the House and Senate last night, ending a weeks-long fiscal stalemate between the Obama administration and Republicans in Congress. The bill passed on an 81-18 vote in the Democratic-led Senate, followed by a 285-144 vote in the Republican-controlled House.


Concerning the consequences of the shutdown, S&P estimates that it will reduce the Q4 output by $24billion. In parallel, A Pew Research Center poll showed that the longer the shutdown went on, the more Americans blamed Republicans over Obama and other Democrats.


From Bloomberg:


The partial government shutdown that resulted from the deadlock has taken at least $24 billion out of the U.S. economy so far, reducing fourth-quarter growth by at least 0.6 percentage points, according Standard & Poor’s…
A Pew Research Center poll showed that the longer the shutdown went on, the more Americans blamed Republicans over Obama and other Democrats. Seventy-two percent of Americans surveyed Oct. 9-13 disapproved of the job Republican leaders in Congress were doing, while 51 percent disapproved of Obama’s performance. Lawmakers have more than a year before they face voters again in midterm elections.


The last-minute agreement doesn’t eliminate the core conflict in Congress over fiscal policy, and the temporary funding extension for the government expires on Jan. 15. The debt ceiling increase expires Feb. 7. As a consequence, the two parties will fight again in three months (continuing resolution, debt ceiling and 2014 budget).

My view is that this agreement is a good news because it will reduce uncertainty in the short term and will boost consumer confidence (after reaching a nine-month low) as holidays approach. However, this agreement is only temporary and therefore companies’ visibility should remain limited until Q1 2014, limiting CAPEX and hiring.

After Fiscal Mess, Uncertainty Concerning Monetary Policy is Coming in US

According to FT, Larry Summers, which is now seen as the front-runner to replace Fed Chairman Bernanke, made dismissive remarks about the effectiveness of quantitative easing at a conference in April, raising the possibility of a big shift in US monetary policy.


More from FT:


“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.
Mr Summers – who served as President Barack Obama’s chief economic adviser from 2009-2010 – has seldom spoken in public about monetary policy. Markets have little sense of his current thinking and may be surprised by his apparently hawkish stance on QE.


The disclosure of his remarks comes as the race for the Fed chairmanship is widely regarded as being between Mr Summers and Janet Yellen, the current Fed vice-chair, who has been an architect of its QE policies. The fact is that even if even Larry Summers seems to be backed by President Barack Obama, that’s not the case for a number of US Senate Democrats who sent a letter supporting Janet Yellen as the next Fed Chairman.


More from FT:


A number of US Senate Democrats are circulating a letter supporting Janet Yellen to be the next chair of the Federal Reserve in an ominous sign for supporters of Larry Summers.
The letter has been pushed by Sherrod Brown from Ohio, Senate officials said, one of the chamber’s leading liberals and a longtime critic of financial deregulation and trade liberalisation.
Signatories include Tom Harkin of Iowa, and Dianne Feinstein of California.
Senate officials said a single copy of the letter had been circulated to the chamber’s 54 Democrats. It is not known how many senators have signed the letter.


The second story shows that there could be some tensions in the Democrat Party in a context where President Barack Obama will confront with lawmakers (after a long August holiday) on a daunting list of decisions affecting the economy (“continuing resolution”, 2014 fiscal budget, fiscal consolidation plan and debt ceiling) and therefore will need the full support of his party. If he remains isolated and unable to find a compromise with Republicans, automatic, across-the-board budget cuts of $109 billion, could entry into force on October 1st.


In the meantime, if Larry Summmers is chosen, it could apply a less accommodative monetary policy which could increase uncertainty and the fear of a return into recession.

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.