(MENAFN- Arab Times) Skewed data and the economic setback of the partial government shutdown face Federal Reserve policymakers as they review their economic stimulus program on Tuesday and Wednesday. The broad consensus is that, in their first meeting with Janet Yellen as the official heir-apparent to chairman Ben Bernanke, the Federal Open Market Committee will opt again to wait for more evidence of economic strength. That will prolong the guessing game of when the "taper" of QE3, the Fed's $85 billion-a-month bond-buying stimulus program, will begin. But Bernanke, and his close ally Yellen, have stiffly refused to bow to market expectations, pledging to act only when economic data supports it. The FOMC stunned markets in September when it decided not to begin reeling in the centerpiece of its efforts to boost US growth.
Guided by Bernanke's own signals, most analysts and investors had expected for months that the drawdown of the quantitative easing program was coming then, and stocks had fallen while bond yields pushed up sharply. The markets then reversed on the FOMC's narrow Sept 18 decision, with stocks soaring to new records on the prospect of the easy-money spigot staying open and keeping interest rates low. In a show of prescience then, Bernanke said they were worried about a possible government shutdown and a US default on its obligations due to the building fight in Congress over raising the debt ceiling and passing a budget for fiscal 2014.
As it turned out, on Oct 1, the first day of the fiscal year, there was no agreement and the government shut down partially for 16 days. It reopened only after a short-term budget was agreed and the debt ceiling was lifted, barely averting a default. Analysts said the damage of idling hundreds of thousands of federal workers cost the economy $25 billion and lopped up to 0.5 percentage points from fourth quarter growth. Also damaged was the data flow: collection and release of information that could tell the Fed how the economy is doing was interrupted and delayed. In the Oct 29-30 meeting, markets will be surprised if the Fed does begin reducing the stimulus. Most analysts expect the taper will be held off until next year, which would mean only when Yellen takes the helm - pending her confirmation in the US Senate.
Lowest
The data that has come so far shows a dull economy: trade was flat in September; durable goods orders, excepting aircraft, were slightly down; job creation in September was tepid; and the University of Michigan consumer sentiment reading fell on Friday to its lowest level since January amid a surge in pessimism. And the Fed's own Beige Book survey of regional economies showed slower growth in a number of areas. With all signs showing low impetus for businesses to invest and hire, Charles Evans, an FOMC member and president of the Chicago branch of the Fed, suggested on Oct 17 that reeling in the stimulus was not in the cards this month. "It is not yet time to remove accommodation. The data are still not definitive enough to say that now is time to adjust the QE3 flow purchase rate."
The data, especially on jobs market progress, will be questionable through December, said Ian Shepherdson at Pantheon Macroeconomics. But an earlier Fed move could lower pressure on Yellen to demonstrate her vision when she arrives. The Federal Reserve says it is tightening the security procedures in place when it releases information to reporters. In a statement, the US central bank says the additional controls will start with next week's meeting and were put in place after consultations with news organizations. The measures include holding a lockup at the Federal Reserve, where transmission of the news will be over data lines controlled by the central bank. The Fed says it believes the measures will protect against the premature release of the decisions made by its interest-rate setting panel.
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