Congress may contribute to keeping interest rates lower for longer.
In a note Monday on the upcoming political calendar, Goldman Sachs’ Alec Phillips said that a protracted debate over the federal budget could add another reason for the Fed to wait, just like in 2013.
“We see some parallels between the current political and legislative landscape and the one that existed in September 2013, when many observers including ourselves expected the committee to begin tapering asset purchases,” wrote Phillips.
In September 2013, the Fed was debating whether to start to slow down its third round of quantitative easing when the first fiscal cliff and government shutdown began to loom. Instead of tapering the asset buying like many Wall Street analysts and media outlets expected, the Fed did nothing.
Phillips says that the 2013 concerns started to show up in the FOMC minutes, with language saying the possible shutdown could be a drag on the economy.
“These concerns were certainly not the only issues on participants’ minds at that meeting, and may have played only a small role in the decision to keep policy on hold,” said Phillips’ note. “That said, the risk was apparently seen to be great enough to warrant several mentions in the minutes, despite the fact that at the time the consensus view among most outside observers was that a shutdown would not occur.”
So while there are many negative factors that could hold back the Fed — China’s growth slowdown, uninspiring wage growth, lacklustre manufacturing numbers — Congress could help add another dash of uncertainty.
Writes Phillips,”While this issue is unlikely to be high on the agenda when the FOMC meets in September, the upcoming deadlines do put a thumb on the scale in favour of our expectation of liftoff in December rather than September.”