The government shutdown means the Federal Reserve won't taper its quantitative easing program until 2014, several Fed experts contend.
"The longer the political showdown in Washington continues, the greater the chance that the Fed will defer tapering until 2014," Kathy Lien of BK Asset Management wrote in a Thursday note.
She provides two explanations for this: economic damage, and information loss.
First of all, the shutdown is having a direct impact on the economy. As Deutsche Bank economist Joseph LaVorgna writes in a recent note, "Our estimate is that each week of the shutdown reduces quarterly GDP growth by approximately one-tenth in the initial phase, but this drag intensifies toward two-tenths if the shutdown lingers into a third or fourth week."
Since the Fed only wants to taper if it feels the economy can withstand it, anything that weakens the economic recovery reduces the chances of tapering.
Second, because of the shutdown, the government is no longer producing economic data. Most damagingly, the Bureau of Labor Statistics will not release a jobs report on Friday.
And for Eric Rosengren, president of the Federal Reserve Bank of Boston and a voting member of the FOMC, this lack of information is a major concern. The shutdown "does put out further into the future the time when we can get a real assessment of where the economy is," he said on Wednesday, according to Reuters. "It would make me less willing to remove accommodation until we had good data."
For these two reasons, "If the shutdown extends beyond next week, it may be very difficult for the Fed to justify reducing asset purchases in December, and at this stage, we should forget about a move in October," Lien writes.