The Federal Reserve will delay the first reduction in its bond purchases until March after the government shutdown slowed fourth-quarter growth and interrupted the flow of data, economists said.
Policy makers will pare the monthly pace of asset buying to $70 billion from $85 billion at their March 18-19 meeting, according to the median of 40 responses in a Bloomberg News survey of economists. The 16-day budget impasse in Washington reduced growth by 0.3 percentage point this quarter, economists said in the survey.
Forecasters, surprised when the Fed opted against tapering at its Sept. 17-18 meeting, pushed out their expectations after the shutdown furloughed as many as 800,000 federal workers. The closing also disrupted collection and publication of economic reports the Fed says it needs to determine whether the expansion is strong enough to handle less monetary stimulus.
“It’s going to be harder to extract the signal from the data, and the Fed’s policies are tied to the data,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York who expects the first tapering in March. “They’re waiting for more confirmation the economy is moving in the direction of their outlook, and if we don’t have data or it’s inconclusive, then the Fed isn’t going to feel confident enough in the outlook.”
The U.S. central bank will reduce monthly purchases to a $25 billion pace by July and end the program at the October 2014 meeting, according to the survey conducted this week. Chairman Ben S. Bernanke’s second term ends Jan. 31, and President Barack Obama has nominated Vice Chairman Janet Yellen to succeed him.
Economists had expected the central bank to reduce purchases to $80 billion last month, according to a Bloomberg survey before the September meeting.
“Conditions in the job market today are still far from what all of us would like to see,”Bernanke said at a press conference following last month’s meeting.
Economists after that focused on December as the most probable date for the Fed to begin reducing the purchases. Twenty-four of 41 economists in a Sept. 18-19 survey identified the central bank’s December meeting as the time to taper.
That was before the government shutdown, which was resolved this week when Obama signed legislation opening the government until Jan. 15 and suspending the nation’s debt limit through Feb. 7.
The policy-setting Federal Open Market Committee’s last two meetings this year are scheduled for Oct. 29-30 and Dec. 17-18.
“They’re not tapering in October, but they never were,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “Conceivably, December is still on the table, although it’s possible the integrity of the October data may not be great.”
The shutdown delayed the publication of key economic reports from the Department of Labor and Department of Commerce. It also prevented data collectors at the agency from gathering some of the data at the usual time period. The Labor Department said two days ago the September jobs report will be released Oct. 22, while October’s will be pushed back to Nov. 8 from Nov. 1.
The August report showed employers added 169,000 jobs, less than the median forecast of economists. That report also lowered prior estimates for employment growth in June and July.
Chicago Fed President Charles Evans, an outspoken advocate of pressing on with stimulus, said the central bank should not begin reducing the pace of asset purchases with unreliable numbers.
“Only the data can tell us how much progress we’ve made, and they aren’t saying much right now,” Evans said Oct. 17 in a speech in Madison, Wisconsin. “Data available in September were inconclusive, and since then incoming information has been silenced with the federal government shutdown.”
Even Dallas Fed President Richard Fisher, who has called for reducing asset purchases, said fiscal discord has undermined the argument for tapering. Talk of cutting bond buying has “all been swamped by fiscal shenanigans,” Fisher told reporters after a speech two days ago in New York.
“Across the board -- Fisher to Evans -- they’re saying tapering is further down the road than it might have been if we hadn’t had the shutdown,” said Michael Hanson, senior U.S. economist at Bank of America Corp. in New York and a former Fed economist. If the data are “impaired from the shutdown,” policy makers may wait until January to begin reducing purchases, he said.
Hanson forecasts the economy will grow 2 percent in the fourth quarter, a 0.5 percentage point cut from his expectations before the government shutdown began.
The world’s largest economy will grow at a 2.4 percent annual pace in the fourth quarter, according to the median estimate of economists in a survey last week.
“If the data stay soft, it’s conceivable they won’t be tapering in January,” said Hanson, and the decision could be postponed until March. “It could very well be toward the end of the year,” before the program is finished entirely, he said.
The Fed remained open during the government shutdown and conducted its Beige Book business survey, a collection of anecdotal accounts on the economy through Oct. 7.
Four Fed districts saw slower growth, while the remaining eight said the expansion held steady amid “uncertainty” from the fiscal deadlock, according to the Oct. 16 report.
Growth remained “modest to moderate” as consumer spending maintained gains and business investment grew, the Fed said. Employment growth “remained modest” in September, and price and wage pressures “were again limited.”
The Fed is pressing on with its third round of quantitative easing begun in September 2012, and officials pledged to continue buying until achieving “substantial improvement” in the labor market. The purchases have swollen the Fed’s balance sheet to a record $3.81 trillion.
Americans in October were the most pessimistic about the nation’s economic prospects in almost two years, as concern mounted that the political gridlock in Washington would hurt the expansion, according to the Bloomberg Consumer Comfort Index of expectations.
“A lot of the impact really depends on the behavior of consumers during that time,” said Drew Matus, an economist at UBS AG in Stamford, Connecticut, and a former markets analyst at the New York Fed, who expects the central bank to begin reducing purchases in January. “The fact that most government workers knew that they were going to get their money is probably one of the reasons if you went golfing in the last couple weeks you probably had trouble getting tee times.”
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