Why the Fed is not likely to taper until 2014
NEW YORK (CNNMoney) When it comes to the government shutdown and possibility of a debt default, the Federal Reserve can’t save the day — but that may not stop it from trying to soften the blow to the U.S. economy.
It is becoming increasingly likely the Fed will keep its stimulus program in place longer than many expected. Since last September, the Fed has been buying $85 billion in bonds each month in an effort to lower long-term interest rates, particularly on mortgages.
Many economists once thought the Fed would start gradually reducing that program this year — a process that has come to be known as “tapering.” But now some are saying the Fed may wait another five months before it begins to wind it down.
Here are three reasons why the Fed may keep its stimulus in place.
Shutdown weighs on economic growth: The longer the government shutdown continues, the worse the impact will be on the economy.
Economists at Moody’s Analytics estimate the shutdown could cost the economy about $50 billion, if it drags on for three or four weeks. That’s roughly equal to the amount of growth lost due to Hurricane Katrina and Superstorm Sandy combined. The impact becomes much larger if the debt ceiling isn’t raised and the government defaults on its debt.
“Lingering uncertainty – let alone a fiscal accident – would raise the chances that the Fed does not taper until next year,” said Ethan Harris, global economist for Bank of America Merrill Lynch in a research note.
Where’s the data? Fed officials have stressed that they’re basing their decisions entirely on economic data. If the data indicate that the economy (particularly the job market) is improving at a pace the Fed finds comfortable, they will slowly start reducing the size of the monthly bond purchases. If not, they will continue the purchases at full blast.
But what if the data doesn’t exist in the first place?