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Does the Fed Think the Shutdown Didn’t Hurt the Economy?



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The Federal Reserve’s Open Market Committee, which decides federal monetary policy, concluded its most recent meeting yesterday, after which it releases an official statement about its planned policies and its economic assessment to justify them. This month it made no change in its plans, and didn’t much adjust its economic outlook. In September, they surprised markets by continuing quantitative easing, their $85 billion a month bond-buying program, meaning they think the economy was either slowing down some or certainly not speeding up. It probably remains that way, but they didn’t mention one big issue that people think has probably worsened the situation a bit: the fiscal fight that shut down large parts of the federal government, raised interest rates, and pushed the U.S. government close to fiscal armageddon. That’s one takeaway in a comment from Paul Ashworth of Capital Economics, a global macroeconomic research firm (via Business Insider):

The latest policy statement from the Fed today is remarkable for what it omits rather than includes. Despite the wall-to-wall coverage in the financial markets and media of the two-week Federal government shutdown, particularly what impact it had on the economy, and the new uncertainty over whether a second shutdown could be triggered early next year, the FOMC statement doesn’t make a single clear reference to it. Not one. It’s like the whole thing never happened. The only cryptic reference is to the “available data” when assessing the recent incoming economic data . . . But if officials are trying to downplay the impact of the shutdown and are happier with the level of long-term interest rates, then perhaps a December taper isn’t quite as out of the question as we had previously thought.

Now, there are a number of caveats: For one, it actually may have been somewhat irresponsible for the Fed to weigh in on the effects of the shutdown and the budget fight without a complete understanding of their economic impact (which, ironically, they lack in part because the processing of government data was delayed). One of the ways the Fed presents the data it’s working with is the Beige Book, in which the eight regional Fed banks report what they’re hearing from local banks and businesses about hiring, consumer confidence, etc. — and the October version of that was released around when the shutdown was ended, so we also don’t have a full picture there. But it doesn’t assign much importance to the budget fight at all: “Many” regional banks “noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate,” the Fed summarizes, but otherwise, the effects are either tourism-related, as in New York, Richmond, and Boston, or projected, with businesses worried that if the fight carried on too long, then it’s a real problem.

Those effects wouldn’t be negligible, but they don’t seem to be big enough problems to change the Fed’s opinion of the economy’s short-term trajectory (and they may be right or wrong). Of course, this might still make the whole fight a bad idea, since the GOP got nothing out of it and didn’t have achievable aims — realistically, their expected value from policy victories was almost zero, so non-negligible economic and fiscal damage plus the chance of much more serious damage from a longer fight or a debt-ceiling breech pushes it into the negative territory.

In any case, perhaps we should take a longer view: Just after the shutdown ended, Jim Pethokoukis of AEI wrote about a study from Macroeconomic Advisers that found that fiscal uncertainty since late 2009 has raised interest rates, cut annual economic growth by 0.3 percentage points, and raised the unemployment rate by 0.6 percentage points (equivalent to 900,000 jobs). The “uncertainty tax,” as Pethokoukis puts it, may be less a problem of individual crises over a couple weeks, and more their cumulative effect.

The real problem with our budget battles, of course, is that they haven’t produced good fiscal policy — the Fed has noted throughout this year, quite clearly, that the combination of huge tax increases this year and significant spending cuts has meant a fiscal drag on the economy, which it has a limited ability to mitigate with its own policies, though it’s tried.



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