By Joe Weisenthal
When it comes to talk of policy, the conversation is almost entirely consumed by "The Taper," the possibility that the Fed will reduce the pace of QE asset purchases starting in September. Assuming the economic data doesn't collapse before then, this is likely to be announced in mid-September (the August jobs report will be the final number to confirm whether or not this happens). But while tapering might be seen as tightening by some, such an announcement likely just represents a shift at the Fed in how to fight the ongoing malaise, as more emphasis is placed on forward guidance (commitments to keep rates low) as opposed to asset purchases. And so the whole tapering question is overblown. The bigger immediate story for the market is the fiscal fight, which is getting almost no attention outside of the political press, but is looking kind of 2011ish.
First, at the end of the summer, a new budget needs to be passed. There's a "shut it down" caucus inside the GOP that wants to halt the government if Obamacare isn't defunded, which is something that will never happen, but which is causing John Boehner some headaches, as he tries to defuse this wing of the party. More ominously, though, is the debt ceiling, which comes later in the fall, and which once again the GOP will attempt to use as leverage to get what it wants (spending cuts, perhaps something related to Obamacare). And unlike with the normal government shutdown (which would be very damaging to the GOP politically) the party feels the threat is serious enough that The White House would have to blink, preventing an outcome that would make the party look bad.
It could all get nasty, and nobody is talking much about it. On Wall Street it's getting very little discussion in most of the notes we read, although SocGen has this quick summary today:
News on the US fiscal front is coming to the fore again. One report suggests that the U.S. is within a whisker of the debt ceiling. A Reuter’s article anticipates how the battles in Washington will shape out, seeing an extended calendar into December… “Republicans shape strategy for fall U.S. budget fights. The options include using a deadline in November for raising the nation's borrowing limit as leverage to push Republican causes. .. Boehner's immediate priority is to avoid a political backlash should Republicans and Obama fail to agree on a budget by Oct. 1. .. Boehner emphasized on the conference call that he wanted to move quickly when Congress returns to Washington on Sept. 9, and pass a short-term measure that would keep the government funded for about two months past the Oct. 1 deadline”.
Anyway, long term, the trajectory of monetary policy is the bigger issue. But in the short to medium term this is going to grow as a risk that people talk about it.