Now that we know the Federal Reserve has planned to sit pretty and do nothing with its $85 billion stimulus package, what is the next step? Are there signs that we should watch that could signal the Fed will begin the tapering process before the end of the year?
Honestly, I believe the decision to put off the tapering process was more influenced by the battle between Congress and the White House over a budget than it was the economy.
It seems the beginning of the taper process is more dependent upon what Congress does-- right now, than it does upon economic signs.
The next meeting at which we will hear something about the tapering will be October 30.
I believe this budget battle will have some form of a resolution by the time the Fed meets again. It could be a "continuing resolution" to keep the federal government operating and then possibly a solution to the debt ceiling after some creative accounting by the Treasury Department.
If the debt ceiling is not resolved by the time the Fed meets again, I highly doubt we will hear anything new. I think the Fed wants this issue dealt with before it says anything.
To introduce the battle that we will be observing, the Republican-led House, by a vote of 230-189, passed a short-term government spending plan that would also eliminate funding for Obama care. As expected the voting was party line. It is now expected to go to the Senate where it will be rejected and we will start again.
The rhetoric has already begun as President Obama has accused the House Republicans of almost holding the nation hostage by tying "the de-funding of healthcare reforms" to the passing of a bill, which would increase the debt ceiling.
Investors should stay abreast of how this battle unfolds. The first possible government shutdown is at the end of the current fiscal year, which is September 30, if the government fails to compromise on the spending resolution. That is the skirmish before the battle. A more volatile situation will take place when Congress debates raising the debt ceiling in October.
If the budget battle issue is not resolved by the end of October, what should we look for? The recent tightening of financial conditions could slow hiring and economic improvement; for this reason the Fed decided to wait a little bit longer.
As I have already written, I don't believe this is the only issue.
If the decision is not made to do something at the end of October, the next meeting will be in December, which will also be Bernanke's last meeting before a successor supposedly takes over in January.
Will it make a decision before it brings in a new Chairman?
I could see it happening, but I believe it would have to bring in somebody who shares the same views as Bernanke. I think it would be hard to expect Bernanke's replacement to start afresh in an environment that he/she has a different opinion about.
It seems logical that the successor would need to be involved in the decision-making process. I guess this could happen before Bernanke leaves and we could begin as early as January 2014 with our tapering process.
I don't expect the Fed to make an announcement at the end of October if the budget battle is not resolved. That leaves us until December before you would know anything and much of that speculation rests on how the economy performs between now and then.