As was widely anticipated, the Federal Reserve yesterday decided to keep QE unchanged, however economists said they were astounded by its statement to the market because the Fed had failed to touch on the impact of the government’s 16-day closure, caused by wrangling over the debt ceiling and budget.
“The latest policy statement from the Fed is remarkable for what it omits rather than includes,” said Capital Economics’ Paul Ashworth, the consultancy’s chief US economist.
“There is no explicit mention of the government shutdown or what impact it might have on the economy or the Fed’s monetary policy,” he added. “It is possible Fed officials want to downplay the recent two-week closure and the potential for another shutdown early next year because they still intend to begin tapering the asset purchases at the FOMC meeting in December.”
According to estimates, the government shutdown could wipe around 0.6% off America’s quarterly growth statistics, with ratings agency Standard & Poor’s forecasting the lengthy Capitol Hill negotiations will have cost the economy $24bn (around £15bn).
Capital Economics’ Ashworth said the Fed is probably waiting for “more evidence” progress in the labour market will be sustained. That said, Ashworth also noted the absence of any caution around the impact tightening financial conditions could have. “Obviously, Fed officials have been comforted by the drop back in long-term interest rates,” he argued.
Taken together, Ashworth said it is difficult to interpret what the Fed’s motives could be for avoiding the subject of shutdown and dropping the language used in its September statement surrounding tightening and QE.
On one hand, the Fed may be feeling more upbeat, Ashworth said, and chose to gloss over the shutdown because of this. If so, it could also mean some officials are eyeing the additional cost of QE if it runs until new year, the economist added.
On the other hand, if the Fed is feeling happier, a December taper is not unlikely, he continued, and Marc Ostwald, of Monument Securities, echoed these views and said the Fed seemed determined not to upset markets.
Agreeing with Ashworth, Ostwald also noted the omission about tightening; pointing out that the Fed seemed “very modestly less dovish”.
Ostwald added that this did reflect reality, though. He explained: “The omission does suggest they are in principle happy with current long-term bond yields, perhaps also aware that the risk of fuelling a further fall in yields by sticking with the previous wording would run counter to any future tapering efforts [or] initiatives.”
