– Congress has at last reached an agreement to reopen the federal government until 15 January, and to raise the debt ceiling until 7 February. The agreement, immediately signed into law by the…
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President, allowed the reopening of federal offices Thursday. Therefore, the various federal agencies should resume publishing statistical data; the BLS announced that the publication of the September Employment report on Oct. 22nd, the October Employment report on Nov. 8th and price data between the 23rd and the 30th of October. The vote caused a split in the republican party, with a result of 285 (of which 87 republicans) to 144 at the House, and 81 (of which 27 republicans) to 18 at the Senate. The agreement abolishes only a marginal element of the health care reform (the funding of some medical devices). As expected, the law provides for the establishment of a joint committee to discuss spending and tax issues, and define corrective measures by 13 December.
– The consequences of the recent conflict will leave scars on the republican party, which has had to bow down. Indeed, the agreement does not block the healthcare reform (which was the main goal of the extremist republican faction). Opinion polls show that the public thinks republicans are responsible for the shutdown and the dramatic uncertainty. It remains to be seen whether the party’s possible shake-up will result in a shift in the party’s balance of power to the advantage of the more moderate components. Prominent members voted against the law, including P. Ryan, who evidently plans to guide the votes of the radical faction during the joint committee negotiations in the months ahead, and then in his future quest for the presidency. Ryan is the chairman of the House Budget Committee, and was the first to attempt to shift the focus of negotiations to the medium-term budget.
– The balance of power within the republican party, and in particular stern containment of the extremist thrust, will prove crucial in the coming months. This is because the deal reached is once again a bridge-agreement which only pushes back the problems on the floor by a few months: between January and February, the United States could itself in the same situation as a month ago. For the time being, it seems likely that the serious reputational damage incurred by the republicans as a result of recent events will lead to greater openness to striking a deal.
The conflict will now focus on Medicare, and shift from the healthcare reform: this may allow common ground to be found with the democrats, probably based on proposals that had been included both in the budget presented by the Obama, and in the one drawn up by P. Ryan in the spring. The negotiations are likely to also discuss the 2014 discretionary cuts to public spending, and touch on a possible tax reform.
– The joint committee will have around three months to strike a deal: there is no certainty that an agreement will be reached by February, to extend financing of the Treasury and raise the debt ceiling. The experience of 2011 is not encouraging: the bipartisan committee established at the time drew up a report for the resolution of the federal budget’s long-term problems, but Congress failed to embrace its indications, and the sequester on discretionary spending followed in the absence of a deal. Therefore, while celebrated by the markets, the solution of 17 October does not eliminate uncertainty and the risk of an escalation of tensions as the new deadline in the beginning of 2014 approaches. At the moment, we expect an agreement to be found within the deadlines laid out by the law (2014 is an election year), with the possibility of a modest slackening of fiscal conditions compared to current legislation.
– The cost of the government shutdown, and the heightening of uncertainty, will be felt in 4Q 2013, but should be transitory and limited to around 2-3 tenths of GDP growth. The lack of reliable information and the short-term shock will prompt the Fed not to alter its asset purchase programme until early 2014. Therefore, the United States, temporarily hurt in its economy and reputation, should at least enjoy a generally more accommodative economic policy next year, and manage to continue on its recovery path.
Source: BONDWorld – Intesa Sanpaolo – Research Department
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