Congress “smashed the instrument panel” of U.S. economic data: Fed’s Fisher

October 18, 2013

Richard Fisher, president of the Dallas Federal Reserve and one of the U.S. central bank’s arch inflation hawks, took us by surprise this week – he told Reuters that, given all the uncertainty generated by the government shutdown, it would not be prudent for the Fed to reduce its bond-buying stimulus this month.

“It is just too tender a moment,” he said. That was on Tuesday, before a last-minute deal averted a debt default but set up additional uncertainty by pushing the statutory spending cap into February.

Fisher said he wishes the Fed had begun the so-called ‘tapering’ process in September as markets has expected. But while he did not rule out a pullback from the current $85 billion monthly pace of asset purchases in December, he did acknowledge the next couple months of data could be “noisy” as economists try to weed out temporary shutdown effects from the broader trend.

Not to mention that some key data releases like the September employment report have been delayed. Comparing the monetary and fiscal authorities to co-pilots on a plane, the always-colorful Fisher said Congress hadn’t just pulled on the brakes even as the Fed continued to push full-throttle: “They’ve smashed the instrument panel.”

No wonder market participants, who were so certain about a Fed move in September, can’t seem to get a read on its likely timing now. As Capital Economics puts it it in a research note, monetary policy has become “a slave to fiscal uncertainty.”

Even if Congress manages to keep the Federal government open and raise the debt ceiling next year, the continuing fiscal uncertainty is only going to make the Fed’s job that much harder. That fiscal uncertainty comes in addition to the uncertainty surrounding the impact that the two-week shutdown had on the economy, including the delay to the flow of economic data. On balance, we still expect that the Fed will begin to taper its asset purchases before the end of this year, but we wouldn’t rule out a longer delay, possibly even until mid-2014.

With the government now reopened, the Labor Department is set to release the September jobs report on Tuesday.

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