The Day Ahead: Back to Business as Congress Quickly Passes Debt Deal

Congress apparently thought the 10/17 debt ceiling deadline was a much bigger deal than financial markets.  It’s not that markets didn’t perceive an actual default as a big deal–just that they’d already worked out that it would be at least another two weeks before any payee was at risk of not being paid by the US Government.  As such, more than a few traders, analysts, and economists opined that the shutdown could last well past the actual debt ceiling deadline (which only marks the point beyond which Treasury can no longer issue new debt).

The decision made by the Federal Reserve in September to maintain the pace of asset purchases has brought long-term interest rates back down and has cushioned some of the adverse impact of the shutdown and debt ceiling debates however it will not be enough to offset  some near term weakening of momentum and fiscal headwinds.  Fannie Mae’s economists expect the Fed to start tapering next year and end its asset purchase program in the second half of 2014.  They expect no funds rate hikes until Q3 2015 when they expect unemployment to decline near the magic Fed number of 6.5 percent.