POLITICS: PennAve

Politics in Washington could disrupt the economy

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Debt Ceiling,PennAve,Joseph Lawler,Economy,Federal Reserve,Ben Bernanke,Larry Summers

September and October will bring at least four major threats to the economy, all of them originating in Washington. But despite the possibilities for disruption, most analysts and economists are relatively hopeful the economy will get through unscathed.

The first will be the long-anticipated “taper” of monetary stimulus, which most analysts expect to follow the Federal Reserve’s Sept.17-18 meeting.

Soon after, President Obama is expected to announce Fed Chairman Ben Bernanke’s replacement, who will be tasked with overseeing the winding down of the Fed’s historic stimulus efforts.

Only days later, the country will face the threat of a government shutdown. The federal government’s spending authority runs out Sept. 30, and the Democratic-led Senate and Republican-run House must reconcile their differences over spending levels before then to keep the government running.

Lastly, the Treasury will run out of headroom under the debt ceiling and risk a default around mid-October, by Secretary Jack Lew’s projections.

All four major economic events will unfold while the Obama administration focuses on Syria.

But despite the number of economic unknowns, analysts hope the economy will escape without major incident. Key market players are less worried about this round of artificial crises in Congress than they have been about past ones.

“Ultimately, we do not see a systemic threat emerging from these events and expect any ‘September struggle’ to be short-lived,” Deutsche Bank economist David Folkerts-Landau wrote in a recent report.

The upcoming congressional fiscal fights are not perceived as a major threat partly because such showdowns have become familiar and have been resolved with little economic harm in the past.

House Speaker John Boehner, R-Ohio, has signaled that he would like to pass a short-term continuing resolution that would keep government funding levels constant – a move that would largely defuse the fight over a shutdown. And while Boehner has promised a “whale of a fight” over the debt ceiling, investors aren’t convinced that lawmakers’ bargaining tactics translate to greater risks this time. Goldman Sachs’ Alec Phillips wrote in a recent note that “while the process may lead to increased market volatility in the days leading up to the deadline, we do not expect a debate as disruptive as the 2011 debt limit increase proved to be.”

The 2011 episode also turned out to be less costly than expected. Although indices of uncertainty shot up and Standard & Poor’s downgraded the government’s credit rating, it’s not clear economic growth was harmed. Dean Baker, an economist at the left-of-center Center for Economic and Policy Research, noted recently that non-residential investment grew strongly following the debt ceiling showdown, and interest rates on Treasury bonds fell – both the opposite of what would be expected if the fight had harmed the economy.

As for the massive changes at the Federal Reserve, they appear already to be baked into the markets. Most investors expect the central bank to begin tapering its stimulus in September or October, a perception that has been strengthened since Bernanke hinted at an exit in May.

As Harvard professor and former Obama economic adviser Larry Summers solidifies his standing as the frontrunner to succeed Bernanke, some observers are suggesting that he poses a risk to the tepid economic recovery. Economists with BNP Paribas wrote this month that Summers’ nomination could slow employment growth by up to 500,000 jobs over the next two years.

Nevertheless, Summers’ nomination would take months to approve, and he would take office in February, halfway through the timeline Bernanke mapped out for the winding down of stimulus bond purchases.

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