Susan Walsh, File, Associated Press
WASHINGTON — The Federal Reserve's decision last month to maintain the size of its economic stimulus was a shocker. Just about everyone expected a pullback in its bond purchases, which have helped keep loan rates low.
Thanks to the government's partial shutdown, many analysts don't think the Fed will reduce its stimulus before next year. And with the White House's choice of the like-minded Janet Yellen to succeed Ben Bernanke as chairman next year, the Fed will likely be cautious about any pullback in early 2014.
Bernanke and the Fed may also now look a bit wiser to those who questioned their stance last month. After all, a key reason Bernanke gave for maintaining the pace of the Fed's stimulus was Washington's budget impasse. It posed a risk to the economy and financial markets, he suggested.
Bernanke said the budget standoff would likely make it harder to know whether the economy was strong enough for the Fed to slow its stimulus.
If anything, the economic outlook is getting darker: Even if the partial shutdown ended now, a graver threat awaits: A deadline to raise the federal borrowing limit. If Congress doesn't raise the limit by Oct. 17, the government would soon run out of cash to pay interest on its debt. Any missed payment would cause a default. Another recession would likely follow.
In hindsight, many economists think the Fed would have erred if it reduced its stimulus last month.
It almost did.
Some Fed officials have said the policy committee's decision at the Sept. 17-18 meeting against paring the $85 billion in monthly bond purchases was a close call.
Still, one voting member of the committee, James Bullard, head of the St. Louis Federal Reserve Bank, noted that Fed officials have stressed that any pullback in bond purchases would hinge on the strength of the economy. Some data released before the Fed's September meeting had showed a weakening economy, Bullard noted.
On Wednesday, details about last month's decision could emerge when the Fed issues the minutes of the September meeting. The minutes will likely show concern that the economy wasn't growing as fast as the Fed had forecast and that some indicators, such as job growth and consumer spending, had weakened.
Even after the Fed chose last month not to slow its stimulus, some analysts said it might reduce the bond purchases at its next meeting Oct. 29-30 or at the final meeting of the year, Dec. 17-18.
Few are saying so anymore. What's changed was the partial shutdown, which many analysts hoped would be averted, and the growing risk that Congress won't raise the debt limit and will cause the government to default.
Now, many economists say they think the Fed will leave its support at the current high level into 2014.
"With everything that is happening with the federal budget, the Fed is going to be even more cautious about doing anything," predicted Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. "The best approach they can take right now is stand pat and watch."
For one thing, the outlook for the economy will remain murky as long as the partial shutdown goes on. The shutdown has delayed the government's release of critical economic data. The jobs report for September, for example, was due out Oct. 4 but has yet to be released.
In the meantime, the Fed will need to monitor the economic effects of both the shutdown and the possibility of a government default.
Treasury Secretary Jacob Lew has told Congress that he likely will have exhausted all the book-keeping maneuvers he can use by Thursday of next week. By then, the government will have only about $30 billion cash on hand.
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