The Federal Reserve is likely to postpone any decision on exiting or tapering its quantitative easing program until 2014. Current members of the FOMC are hyper-sensitive to economic data, especially regarding US labor markets. The government shutdown and debt ceiling debate has negatively impacted economic growth as well as made what economic data that is being released suspect in terms of informational value. Our own view is that the events in Washington, DC, will possibly cost the US economy about 1.5% real GDP growth in Q4/2013. Our projections back in the summer of 2013 were for a 2% annualized growth rate in Q4/2013, and now we have lowered our projection to 0.5% real GDP growth. The Fed will likely want to wait on more dependable evidence to form its own conclusions, and thus any decision on QE is now on hold.
A key problem stemming from the government shutdown is the level of staffing at the departments in charge of US economic data collection. It is not only that the intensely watched employment report previously scheduled for the first Friday of each month was delayed in October. The whole data collection process has been impacted in ways that are difficult to determine until after the reports are eventually released.
For example, the establishment survey that underlies the collection process for non-farm payrolls data is based on the question of how many employees are working on the 12th of the month. The data eventually collected and processed for October will be highly suspect and probably subject to potentially large revisions. The household survey that underpins the collection of labor force and unemployment data may be impacted even more, with a potentially large deterioration in the information quality of data for several months. The data release delays and then the subsequent confusion over interpreting possibly flawed data means the data-dependent FOMC may need to wait for the employment report scheduled for the first Friday of January 2014 before they get a dependable read on how the US labor markets coped with the uncertainties of the government shutdown, budget process, and debt ceiling debate.
If the data delays and confusion were not enough, the membership of the FOMC is undergoing big changes. Janet Yellen will probably be confirmed by the US Senate and take over the Chair of the Fed at the January 28-29, 2014, FOMC meeting. Among others, regional Fed Presidents Charles Evans (Chicago) and Esther George (Kansas City) rotate off as voting members of the FOMC, and Charles Plosser (Philadelphia) and Richard Fisher (Dallas) rotate on. As many as three board members may leave during 2014 and eventually be replaced.
The implications of how a newly constructed FOMC might decide future policy should not be underestimated. The new Fed Chair may be worried about inflation being too low and unemployment too high, but there is also the credibility of the Fed to consider. The current $85 billion per month QE asset buying program represents annual asset purchases greater than 6% of GDP and some one-third larger than the federal budget deficit for FY2013. Such a massive asset buying program was never intended to be permanent. With the Fed’s balance sheet now exceeding 20% of the nation’s GDP, the newly constituted FOMC may well feel some internal fears about the serious negative unintended consequences of maintaining such a huge QE program, regardless of the state of the economy.
-Blu Putnam, Chief Economist, CME Group
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
