WASHINGTON – The Federal Reserves decision last month to maintain the size of its economic stimulus was a shocker. Just about everyone expected a pullback in its bond purchases, which have helped keep loan rates low.
Thanks to the governments partial shutdown, many analysts dont think the Fed will reduce its stimulus before next year. And with the White Houses choice of the like-minded Janet Yellen to succeed Ben Bernanke as chairman next year, the Fed will likely be cautious about any pullback in early 2014.
Bernanke and the Fed may also now look a bit wiser to those who questioned their stance last month. After all, a key reason Bernanke gave for maintaining the pace of the Feds stimulus was Washingtons budget impasse. It posed a risk to the economy and financial markets, he suggested.
Bernanke said the budget standoff would likely make it harder to know whether the economy was strong enough for the Fed to slow its stimulus.
If anything, the economic outlook is getting darker. Even if the partial shutdown ended now, a graver threat awaits: A deadline to raise the federal borrowing limit. If Congress doesnt raise the limit by Oct. 17, the government would soon run out of cash to pay interest on its debt. Any missed payment would cause a default. Another recession would likely follow.
Even after the Fed chose last month not to slow its stimulus, some analysts said it might reduce the bond buying at its next meeting Oct. 29-30 or at the final meeting of the year, Dec. 17-18.
Few are saying so anymore. Whats changed was the partial shutdown, which many analysts hoped would be averted, and the growing risk that Congress wont raise the debt limit and will cause the government to default.
With everything that is happening with the federal budget, the Fed is going to be even more cautious about doing anything, predicted Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University.
The best approach they can take right now is stand pat and watch.
For one thing, the outlook for the economy will remain murky as long as the partial shutdown goes on. The shutdown has delayed the governments release of critical economic data. The jobs report for September, for example, was due out Oct. 4 but has yet to be released.