The Federal Reserve's Federal Open Market Committee (FOMC) is scheduled to meet on October 29-30, and again on December 17-18, 2013. While market conditions are certainly fluid and perceptions may evolve, our current assessment is that the FOMC is not likely to make a decision at either of the next two upcoming meetings on when and by how much to reduce its monthly Treasury security and mortgage-backed security purchase programs (i.e., quantitative easing, or QE). Current members of the FOMC are hyper-sensitive to economic data, especially regarding U.S. labor markets, inflation and housing. The likely delay in making any QE exit or tapering decision is directly related to uncertainties over the impact on the U.S. economy in the fourth quarter from the government shutdown and debt ceiling debate. Our own view is that the events in Washington, DC, in October 2013, will possibly cost the U.S. economy about 1% to 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%-1.0% real GDP growth.
Data Release Delays, and then Data Confusion
A key problem stemming from the government shutdown is the level of staffing at the departments in charge of U.S. economic data collection. It is not only that the intensely watched employment report previously scheduled for the first Friday of each month was delayed. The whole data collection process during the month of October may be 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 the labor force and unemployment data may be impacted even more, with a potentially large deterioration in the information quality of data. 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 it gets a dependable read on how the U.S. labor markets coped with the uncertainties of the government shutdown, budget process, and debt ceiling debate.
New FOMC Members Make Any Fed Forward Guidance Suspect
If the data delays and confusion were not enough, the membership of the FOMC is undergoing some big changes. There may (or may not) be a new Fed Chair taking over 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, 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, especially the potential for exiting QE faster and considering raising the target federal funds rate sooner than current Fed forward guidance appears to suggest. 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.
Disclaimer: 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.