Fed expected to hold tight on stimulus after shutdown

WASHINGTON: Skewed data and the economic setback of the partial government shutdown face Federal Reserve policymakers as they review their economic stimulus program on Tuesday and Wednesday.

The broad consensus is that, in their first meeting with Janet Yellen as the official heir-apparent to chairman Ben Bernanke, the Federal Open Market Committee will opt again to wait for more evidence of economic strength.

That will prolong the guessing game of when the “taper” of QE3, the Fed’s $85 billion-a-month bond-buying stimulus program, will begin.

But Bernanke, and his close ally Yellen, have stiffly refused to bow to market expectations, pledging to act only when economic data supports it.

The FOMC stunned markets in September when it decided not to begin reeling in the centerpiece of its efforts to boost US growth.

Guided by Bernanke’s own signals, most analysts and investors had expected for months that the drawdown of the quantitative easing program was coming then, and stocks had fallen while bond yields pushed up sharply.

The markets then reversed on the FOMC’s narrow September 18 decision, with stocks soaring to new records on the prospect of the easy-money spigot staying open and keeping interest rates low.

In a show of prescience then, Bernanke said they were worried about a possible government shutdown and a US default on its obligations due to the
building fight in Congress over raising the debt ceiling and passing a budget for fiscal 2014.

As it turned out, on October 1, the first day of the fiscal year, there was no agreement and the government shut down partially for 16 days.

It reopened only after a short-term budget was agreed and the debt ceiling was lifted, barely averting a default.

Analysts said the damage of idling hundreds of thousands of federal workers cost the economy $25 billion and lopped up to 0.5 percentage points from fourth quarter growth.