Tags: Fed | taper | shutdown | bonds

Shutdown Leaves 'Data-Dependent' Fed Flying Blind

By Wednesday, 09 October 2013 07:47 AM Current | Bio | Archive

The government shutdown drags on with no end in sight — and some important information "out of sight." Investors could end up paying a heavy price that has nothing to do with Obamacare.

Remember the Federal Reserve's taper plan? Financial markets spent the whole summer getting ready for a major policy change that didn't happen. When the surprise wore off, the consensus view shifted. Wall Street anticipated the Fed would start the taper plan at its October or December meetings.

This now looks unlikely — and if the government doesn't re-open in the next few days, the Fed may not taper until well into 2014. Ben Bernanke is a great pilot, but even he can't land a monetary plane with no instruments in whiteout conditions.

Bernanke and other Fed officials have said repeatedly this year that their policy decisions are "data dependent." They want hard economic data to confirm the recovery — and they will keep stimulating until they get it that data.

Consider this from the Sept. 18 Federal Open Market Committee statement: "The Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."

This "evidence" the committee is waiting for includes the September employment report. Where are the Labor Department people who would have released it last Friday? They're on furlough.

The September jobs data will come out eventually, but we may never have reliable October labor market data. They aren't even collecting it. A notice on the Bureau of Labor Statistics home page says, "During the shutdown period BLS will not collect data, issue reports or respond to public inquiries."

The survey that the BLS uses to calculate household unemployment has tight statistical parameters. Each monthly report comes from data compiled during a "reference week." They define this as the calendar week in which the 12th day of the month falls — right now, in other words.

If the BLS comes back to work soon, they can still collect October data a week or two late. That won't be the end of the world, but it will probably make the Fed more cautious. It could take several months for October to roll out of the moving averages used by finicky economists.

As it stands now, the Fed's quantitative easing (QE) policy injects $85 billion per month into the Treasury and mortgage-backed bond markets. The sooner they stop, the less inflation pressure we will face down the road.

If the government shutdown makes the Fed postpone tapering by three months, an extra $255 billion in liquidity will go sloshing through Wall Street. Continued QE is actually good news for bond traders. This may be one reason financial markets have taken the whole episode in stride.

Of course, those same bond traders will wake up fast if we run into the debt ceiling — but even if we don't, the shutdown is already having an impact nobody wanted.

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PatrickWatson
The government shutdown drags on with no end in sight — and some important information "out of sight." Investors could end up paying a heavy price that has nothing to do with Obamacare.
Fed,taper,shutdown,bonds
484
2013-47-09
Wednesday, 09 October 2013 07:47 AM
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