U.S. shutdown, debt-ceiling fight likely to extend Fed’s stimulus even longer

The government shutdown and debt-ceiling fight are clouding the outlook for the global economy and markets, but they are bringing clarity to one area: The Federal Reserve is now likely to keep its foot on the monetary gas pedal even longer to offset damage from the standoff.

Two weeks into the shutdown, some of the fallout is clear. Economic growth will be at least a little slower than it would have been otherwise. Businesses and consumers are less confident about the economy’s near-term course than they were before the shutdown started. And the most closely watched official gauges of economic activity—the government reports suspended by the shutdown—will be unlikely to provide reliable readings for months.

That’s a meaningful—though still manageable—hit to the beleaguered U.S. recovery. An uglier ending to the still-unresolved battle over raising the debt ceiling, or an even longer government shutdown, could wreak worse damage.

The latest events in Washington make Fed officials appear unusually clairvoyant in their decision last month to keep their $85 billion-a-month bond-buying program unchanged despite widespread market expectations of a pullback.

Many U.S. central bankers have tended to be too optimistic in recent years, expecting a stronger economic recovery than they ended up getting.

This time, they wouldn’t allow themselves to be fooled. Fed officials cited “the considerable risks surrounding fiscal policy” as one reason to leave policy unchanged, according to minutes of the Federal Open Market Committee’s September meeting, released last week.

The considerable uncertainty about the economy has led private-sector forecasters to push back their own expectations for a change in Fed policy.

In the latest Wall Street Journal survey of economists none of the 46 respondents expected the Fed to announce a change to its bond purchases at its Oct. 29-30 meeting. In the survey a month earlier, two-thirds had expected at least some reduction in September or October.