Dimmer view of economy makes Fed pullback unlikely

After a 16-day partial government shutdown and a batch of tepid economic data, no one thinks the Fed is ready to reduce its stimulus when it meets Tuesday and Wednesday.
Associated Press
Oct 29, 2013

 

A lot can change in six weeks.

When the Federal Reserve last met in mid-September, almost everyone expected it to start reducing the stimulus it's given the U.S. economy to help it rebound from the Great Recession.

It didn't. The Fed pulled a surprise by deciding not to slow its $85 billion-a-month in Treasury and mortgage bond purchases. Its bond buying has been intended to keep long-term loan rates low to support the economy.

And now? After a 16-day partial government shutdown and a batch of tepid economic data, no one thinks the Fed will reduce its stimulus when it meets Tuesday and Wednesday. Many analysts now predict the Fed will maintain the pace of its bond purchases into next year.

Blame the uncertainty surrounding Congress' budget fight and renewed questions about the economy's health.

"I think March is now the earliest that any reduction in bond purchases will happen," said Diane Swonk, chief economist at Mesirow Financial.

By then, Fed members expect to have seen several months of stronger job growth. They also expect Congress to have resolved its budget impasse.

If the Fed does start slowing its stimulus in March, it will have left its policy unchanged not just this week but also at its next meeting in December and at its subsequent meeting in late January. The delay would signal a dimmer economic outlook.

The January meeting will be the last for Chairman Ben Bernanke, who is stepping down after eight years. President Barack Obama has chosen Vice Chair Janet Yellen to succeed Bernanke.

Assuming that Yellen is confirmed by the Senate, her first meeting as chairman will be in March. Many economists think no major policy changes will occur before a new chairman takes over.

Congress' budget fight has clouded the Fed's timetable. Though the government reopened Oct. 17 and a threatened default on its debt was averted, Congress adopted only temporary fixes. More deadlines and possible economic disruptions lie ahead.

A House-Senate conference committee is working toward a budget accord. But wide differences separate Democrats and Republicans on spending and taxes. Without a deal by Jan. 15, another shutdown is possible. Congress must also raise the government's debt ceiling after Feb. 7. If not, a market-rattling default will remain a threat.

The standoff has led economists to trim their forecasts for economic growth in the October-December quarter. U.S. employers added just 148,000 jobs in September, a steep slowdown from August. And temporary layoffs during the shutdown are expected to depress October's job gain.

The shutdown also postponed the release of many of the government's economic reports. The delay has made it harder for Fed officials to assess the economy.

Given the uncertainties, analysts think the Fed will be cautious about paring its economic support. In June, when Bernanke suggested the Fed could reduce its bond buying by year's end, the Dow Jones industrial average plunged 560 points in two days. Many investors feared the Fed might remove its support prematurely and derail an already subpar recovery from the recession.

Interest rates rose, too. The increase particularly in mortgage rates, before the Fed had even begun to change policy, alarmed the central bank. Higher mortgage rates could dampen the gains in housing, which has been a rare bright spot for the economy.

In explaining its decision to maintain the pace of its purchases, the Fed expressed concern in September that higher rates, if sustained, could slow any improvement in the job market and the economy.

Given the panic among investors when Bernanke raised the prospect that the Fed would slow its bond purchases, analysts think any pullback will be very gradual. That's especially true if a pullback starts in March or later, when Yellen would be chairman and considering her first major policy move.

"The one thing Janet Yellen will not want to do is start her term by making a mistake," said Brian Bethune, an economics professor at Westmont College in Santa Barbara, Calif. "She will be extremely cautious and will try to signal that the Fed is starting to back off its bond purchases without causing the kinds of effects we saw in the summer."

This week's meeting is the first since Obama announced Oct. 9 his choice of Yellen to be chairman. David Jones, chief economist at DMJ Advisors and the author of several books on the Fed, said her status could change the dynamics this week.

"Bernanke is essentially a lame duck, and Yellen has not yet taken over," Jones said. "It will make the Fed more cautious."

Sen. Rand Paul, R-Ky., has said he will oppose Yellen's nomination unless the Senate votes on a bill he's sponsoring to subject the Fed's rate decisions to review by the Government Accountability Office. Yellen is expected to win Senate confirmation. But Paul's efforts could slow the process.

The Senate Banking Committee is considering holding a hearing on Yellen's nomination on Nov. 14. But a vote by the full Senate might not come until January.

Once the Fed starts trimming its bond purchases, economists foresee reductions of $10 billion to $20 billion a month as long as the economy improves consistently. Some analysts think the Fed could finish its purchases by the end of 2014.

"But if something goes wrong, then they will stop or at least slow down the reductions," said David Wyss, a former chief economist at Standard & Poor's and now an economics professor at Brown University.

 

Comments

There you go again

I thought Mr. Obama said the economy was improving?!?! Don't tell me it was another lie. Man, I can't take it anymore.......

The Big Dog's back

Good, now go out and get a job.

There you go again

What kind of response was that?!?!

neym33

Google is paying 80$ per hour! Just work for few hours & spend more time with friends and family. Yesterday I bought a top of the range Lancia after having made $9458 this month. Its the most-financialy rewarding I've had. It sounds unbelievable but you wont forgive yourself if you don’t check it out http://goo.gl/f6e95V

Darwin's choice

Well,Mr. Obama, where are all these "jobs"? troll

KnuckleDragger

On to other news. Big Dogs wet noodle of a Pres is no longer considered the most powerful person in the world, the new title goes to none other than Vladimir Putin. ROTFLMAO!!!

http://money.msn.com/investing/t...

shucks

Doctor huh?
That news made you a little giddy , huh?

Aren't you brilliant enough to realize that the President plus all the idiot Republicans and Tea-Baggers represent the country you live in ?

You are too small of a person to be a doctor as YOU claim.

KnuckleDragger

Apparently you are not brilliant enough to know they weren't looking at Congress. You also aren't smart enough to figure out that Dems in Congress enjoy an approval rating nearly as low as the Repubs and Tea Party. You obviously live in an alternate universe if you actually believe any part of our government, regardless of what party controls it is functioning properly.

Our President is who the world looks at when it comes to leadership, and ours is failing miserably right along side our Congress.

As for the Doctor comment, no not yet, I am a Doctoral candidate pending my dissertation. It's obvious you lack the intellectual ability to debate me without the name calling.

shucks

Yeah , that little Republican stunt didn't help our world image.
http://www.washingtonpost.com/wo...

"Obama had been No. 1 every year in office, except for now and in 2010 when Chinese leader Hu Jintao was tops."
http://nypost.com/2013/10/30/for...
Not bad--- kind of petty thinking on your part.

Pffftt right , you are above name calling.

You don't come across as impressively intellectual.

The Hero Zone's picture
The Hero Zone

[Incoming sarcasm.]

We need the Federal Government to set up Economic Marketplaces where we will be compelled to participate on individual and business levels. If we don't participate in these government-run markets we will have to pay a tax penalty. Millions and millions of Americans either do not participate nor have full participation in the current system. That is unfair.

Since private industry and commercial interests have been abusing the population for many years, we need a central planning committee to help us decide what products to make, how much to sell them at, and regulate every step of the way. Minimums will be in place to ensure quality spending levels and to offer peace of mind to the average consumer who will, for many, be the first time they can ever spend or invest their money.

Don't be worried. If you like a product, you can still buy your product. If you like a business, you can still shop at your business. Period. In fact, by forcing people to spend their money, we can save an average family $2,500 yearly. Now, states can choose to either set up their own marketplaces or have the Federal Government do it for them through specially-designed websites that will offer you access to several major retailers at once provided they meet Federal standards.

A special advisory panel (disingenuously called "Layaway Panels" by some on the right) will be made to determine policy and review if a product is actually worth having on the market and if it is in the consumers' best interest to buy. They will also periodically review return procedures and approve of any sales to be made in the Marketplace.

Stop It

Some don't get it, HZ.

coasterfan

Every time is starts to improve, more cuts are enacted. This, as any economist will tell you, will further stunt growth of the economy and hinder the recovery. Just this morning, I read that, were it not for the Draconian cuts made over the past few years to appease the Republicans, more than a million more jobs would have been created. Read Paul Krugman's article in today's Toledo Blade.

wowbagger

Here's a Idea, Lets not count even more people so the unemployment record looks better, Prop up the economy by jamming 85 billion a month into it and blame everyone except those in power. ~ Just this morning hundreds of thousands woke up to having their insurance dropped because they trusted Coaster and her herd of liberal maniac's. Later this year we'll get to see the rollbacks to 29 hours a week to avoid their idiocy. Everything they say is either a lie or benefit's their campaign donors.

grumpy

"so the unemployment record looks better,"

From my favorite stats site. click around it, there is more info and charts than one person can possibly use. I follow a few charts and things but for economic charts it is the best I have found.

http://www.nowandfutures.com/mis...

An interesting article on why you can't directly compare Obama's rate of unemployment to bush, the gov't changed how it is counted so it doesn't look as bad.

http://usatoday30.usatoday.com/n...

There are more articles about it if you search for "change in how unemployment is counted " and other related terms. Find a source you prefer... it was reported... but usually on page 21... not the front page or even in the business section... most of the time.

There you go again

"As any economist will tell you" is an incorrect statement. Having a degree in economics I am well aware that Krugman has his theory and other economists have theirs-theory being the KEY word.

Darwin's choice

Coasterfan,Still sucking it in, eh troll?

KnuckleDragger

Well in Coasterfans defense, Obama is a black man so it takes both himself and Big Dog to suck it all in. LOL

grumpy

"Draconian cuts made over the past few years "

Are those the reductions in the INCREASE of spending or actually spending less money that the year before?... One is still an increase in spending while the other is actually cutting spending. When speaking about federal gov't spending, you have to say which it is. Cuts in federal gov't spending can still have spending go up. No where else in this country can such a thing be said... another way gov't hides its sins... It is called baseline budgeting...

http://en.wikipedia.org/wiki/Bas...(budgeting)

Since this is ONLY used by gov't most folks don't know that cuts are actuall reductions in the increase in spending. Another example of gov't lying at worst or shading the truth at best. Since they are the only ones allowed to use it.... you decide if it is lying or hiding the truth....

KnuckleDragger

Krugman is the ONLY economist that will tell you this. He seems to be the only one you quote. What's a matter teach? Still unable to research any opposing viewpoints? How much are you being paid to post these ridiculous comments?

Contango

Re: "as any economist will tell you"

A fallacy.

----------------

Re: "Draconian cuts"

Got examples?

In DC, the term "cut" means only a reduction in the rate of spending.

OMG.LOL.WT_

The FED is a perfect example:

"Insanity: doing the same thing over and over again and expecting different results."
Albert Einstein

If they keep on it will be a simple matter to pay off all the debt (with WORTHLESS money).

Centauri

"After a 16-day partial government shutdown and a batch of tepid economic data, no one thinks the Fed is ready to reduce its stimulus when it meets Tuesday and Wednesday."

Admit it. Our country is broke yet continues wasting billions of dollars on foreign aid. Meanwhile citizens of the United States are dying and suffering from lack of food, shelter, medicines and healthcare.

http://foreignassistance.gov/Cou...
Foreign Assistance By Country Office

http://foreignassistance.gov/OUL...
Foreign Assistance by Office

shucks

Republicans cut $40 billion in food stamps from the citizens of the United States

Darwin's choice

You're full of chit. Post a source for your BS, and drinking from the urinal isn't a source.....

shucks

google it - dim wit

Darwin's choice

You posted, prove it!!

Again, full of chit! Source?

KnuckleDragger

He doesn't want to provide proof because then he will have to admit that this was not really a cut. This was nothing more than the expiration of a temporary increase in food stamp payments due to the 2009 stimulus. This was never meant to be permanent. But hey why would he bother to research it, it's much easier to blame Republicans.

shucks
Darwin's choice

Not only full of chit, but can't understand normal thinking! If you're able to comprehend what you've posted as evidence, it clearly says "proposed" not written into law. The rank and file has to approve it, maybe it's some of that pork in the obamacare "hidden agenda".

shucks

In their hard , little black hearts they did.

Huron_1969

4shizz, Bill Maher doesn't count

shucks

I don't follow him.

AJ Oliver

Foreign aid is a tiny part of Fed Govt spending - and much of it goes to prop up dictators. Spending on poverty programs is also small. The really big bucks are in corporate welfare and the military. Krugman is the man.

grumpy

" Krugman is the man."

http://moneymorning.com/2013/01/...

"Now, to be perfectly clear, I don't believe Dr. Krugman is stupid. Far from it - you don't win Nobel Prizes for being an idiot. However, I do believe that he's trapped in the past--an acolyte of sorts to failed economic policies and doctrine that dates to the 1930s.

Some people, like University of Chicago Finance Professor John H. Cochrane, are more pointed, noting that if Krugman were a scientist, he'd be akin to a "flat-earther," an "AIDS-HIV disbeliever" or somebody who believes the continents don't actually move.

This makes him very dangerous in the scheme of things because Dr. Krugman's solution is that "we" just haven't spent enough money...yet.

I don't know how he can make that argument with a straight face."

KURTje

On a bright note Social Security goes up 1.5% for each entitled. The Federal Reserve...not a government agency. e.r.

grumpy

Depends on how you count inflation as to if that is "fair". Do you think inflation should be counted the same way year after year so it can be compared to other years or should gov't cahnge it often so it can paint a rosy picture for the sheepole? Are you a sheepole? The gov't likes sheepole, the gov't gives them things... for free.... I wonder where gov't gets the free stuff?...

http://business.time.com/2013/03...

http://www.shadowstats.com/alter...

Darwin's choice

According to the AP tonight.....President Obama today praised Oregon for the Obamacare enrollment numbers....but, no one told him that there is not one person in Oregon enrolled in Obamacare!!! ZERO !

Obama/fail

KnuckleDragger

An Israeli doctor says: "in Israel, medicine is so advanced that we cut off a man’s testicles, put them on another man and in 6 weeks, he is looking for work.

“The German doctor says: "that’s nothing, in Germany we take part of a brain, put it in another man, and in 4 weeks he is looking for work.

“The Russian doctor says: “gentlemen, we take half a heart from a man, put it in another's chest and in 2 weeks he is looking for work.

“The United States doctor laughs: "You all are behind us. five years ago, we took a man with no brains, no heart and no balls and made him President. Now, the whole country is looking for work !

-author unknown-