As the Congress passed the bill to raise the debt ceiling and end the partial government shutdown, federal workers returned to work last Thursday. Yet, the 16-day closure has resulted in delays of a number of important economic data, including the non-farm payrolls. The political chaos has also pushed back expectations of the Fed's QE tapering. While failing to announce the schedule of QE reduction in September, the Fed raised the concern that it might be difficult to explain a QE reduction "in coming months absent clearly stronger data on the economy and a swift resolution of federal fiscal uncertainties". What happened over the past 2 weeks has indeed made the October data release less clear that it should be, lowering the likelihood of any tapering announcement in October and even this year.
The release of the US employment report for September is delayed to October 22 (Tuesday) while the October report is delayed to November 8, a week later than previously scheduled. We doubt if the Fed would entirely trust the October readings as many of the data would have been missed. In previous government shutdowns, the survey collection rate for the initial employment report was abnormally low and the revision was large, creating big difference between preliminary and revised data. While the first estimate of the employment data might lack accuracy, the revised data would not be out until early December while preliminary November employment data would also be released around that time.
Such a timeframe suggests that the Fed would not find the data "clear" until early December, weeks before the December FOMC meeting. Yet, the Fed would usually need a few months of evidence to support its decision. With only one set of trustable data, the Fed would find it premature to announce a change in monetary policy even if the data are strong enough. This signals that the possibility of QE tapering in October is now off the table while that for December has been dramatically lowered.
The market had been increasing bets that tapering would begin in 1Q14. Yet, this coincides with the FOMC leadership transition. Fed Chairman Ben Bernanke's term would officially end on January 31, 2014. Yet, he might or might not choose to remain the chairman of the January meeting. Our view is that, if Yellen, assuming she is confirmed to take over Bernanke's role, is voted to chair the January meeting, the likelihood of a tapering in the month would be lowered.
The release of the US employment report for September is delayed to October 22 (Tuesday) while the October report is delayed to November 8, a week later than previously scheduled. We doubt if the Fed would entirely trust the October readings as many of the data would have been missed. In previous government shutdowns, the survey collection rate for the initial employment report was abnormally low and the revision was large, creating big difference between preliminary and revised data. While the first estimate of the employment data might lack accuracy, the revised data would not be out until early December while preliminary November employment data would also be released around that time.
Such a timeframe suggests that the Fed would not find the data "clear" until early December, weeks before the December FOMC meeting. Yet, the Fed would usually need a few months of evidence to support its decision. With only one set of trustable data, the Fed would find it premature to announce a change in monetary policy even if the data are strong enough. This signals that the possibility of QE tapering in October is now off the table while that for December has been dramatically lowered.
The market had been increasing bets that tapering would begin in 1Q14. Yet, this coincides with the FOMC leadership transition. Fed Chairman Ben Bernanke's term would officially end on January 31, 2014. Yet, he might or might not choose to remain the chairman of the January meeting. Our view is that, if Yellen, assuming she is confirmed to take over Bernanke's role, is voted to chair the January meeting, the likelihood of a tapering in the month would be lowered.
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