The US Congress has approved budget spending at current levels untilJanuary 15, 2014. In addition the debt ceiling has been raised, allowing the government to fund spending via new loans untilFebruary 7, 2014. This brings to an end the partial government shutdown and averts the risk of default. At the end of the day the Republicans failed in their bid to scupper implementation of Obama’s signature healthcare reform. The sole concession was an agreement on measures to confirm the incomes of recipients of government health insurance subsidies.
Encouragingly the parties have agreed on the formation of a bipartisan committee from both chambers of Congress, charged with coming up with a longer-term budget plan by mid-December. The talks are likely to take a sweeping look at tax reform and spending program changes, with the objective of replacing the across-the-board spending cuts (“sequestration”) that began in March of this year as a budgetary consolidation tool. This would be in the interests of both parties. A tenable solution would help to end the recurrence of budgetary clashes seen to date.
The fiscal row of recent weeks inevitably prompted jitters on the financial markets. On balance, however, these were tame. The markets are now likely to focus increasingly on monetary policy, especially as in September the Fed had also highlighted the risks to the economy and the financial markets stemming from the fiscal gridlock as justification for the continuation of its bond-purchasing program. The direct impact on the economy of the 2½ week government shutdown (lower public sector output) is likely to have been limited. However, it does render an assessment of the economic situation more difficult as the bulk of relevant economic data could not be published. On top of this, statistical agencies are now likely to need a while before they can publish reliable data. Against this backdrop we think that the decision to start reining in bond purchases will not occur in October but in December at the earliest.