Fiscal Entanglements Begin

The Federal Open Market Committee (FOMC) meets today for a second day of deliberations on the forecast for the U.S. economy.  The main focus today will be the likely announcement that the Fed will begin tapering its stimulus efforts by reducing the amount of bonds being purchased monthly from $85 billion to $75 billion.  Even with this slight adjustment the Fed will continue their stimulus going into the U.S. economy and interest rates should hold at their current low levels for some time in the future.


Janet Yellen, Ph.D., Vice Chairwoman of the Board of Governors of the Federal Reserve System

With Larry Summers out of the picture to succeed outgoing Fed Chairman Ben Bernanke, Federal Reserve Vice Chairwoman Janet Yellen immediately became the front-runner.   Yellen’s supporters are now emboldened more than ever to continue pushing her candidacy even amidst the evident strained relationship between the White House and Senate Democrats that emanated from the Summers candidacy.  The strained relationship between the White House and Senate Democrats will not bold well for them in the fiscal battles ahead.

Meanwhile, yesterday the Congressional Budget Office (CBO) released a report that showed the long-term outlook for U.S. debt remains ominous.  While CBO reported recent declines in the deficit, from $1.1 trillion to $642 billion, current federal tax and spending policies were unsustainable in the out-years.  CBO said, “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past.”

If unchanged, the Federal debt held by the public will increase from the current 73 percent to 100 percent of gross domestic product (GDP) from 2013 to 2038. Such high percent of debt-to-GDP sparked the recent European fiscal crisis. While there remains time to act, the changes needed to alter this course for the U.S. “presents lawmakers and the public with difficult choices,” said CBO.

In related news, last night Republican leaders decided to bring to the House floor the fiscal year 2014 continuing resolution (CR) that would fund federal government agencies from October 1 to December 15 and withdraw funding for the implementation of the Affordable Care Act (P.L. 111-148).  This sets up another big fight with congressional Democrats and will increase the likelihood of a government shutdown after Sept. 30.

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Tim Cansler