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Thu December 19, 2013
The Washington Two-Step: Dancing Back To Normal
Originally published on Thu December 19, 2013 12:24 pm
Time and again, business leaders say the one thing they want out of Washington is more certainty.
But rarely do they get their wish.
In recent years, business owners have found themselves wondering whether their government would default on its debts, shut down national parks, change tax rules, cancel supplier contracts, confirm key leaders at federal agencies or hike interest rates.
Finally on Wednesday, they saw policymakers take two big steps toward a more certain future.
First, the Federal Reserve said it would start to modestly taper its bond-buying stimulus. The changes will start in January — so now you know.
The second move came hours later when the Senate voted 64-36 to complete the first bipartisan budget agreement in years. The $1.01 trillion budget deal resolves many questions about automatic spending cuts and deficit-reduction plans.
That marked "a really big step forward," says John Silvia, chief economist for Wells Fargo Securities.
Congress "lowered uncertainty about fiscal policy, and the Fed lowered uncertainty about monetary policy," he says. As a result, "2014 will probably be a better year" for the economy, he adds.
Putting a specific dollar figure on the cost of uncertainty isn't easy. But Silvia says there's no question businesses are less likely to hire when they don't know what is coming out of Washington.
"A lot of companies have government contracts," he notes. If they can't predict what's happening with spending cuts or shutdown threats, they can't hire. And all business leaders wonder: "Are you going to change the tax rules? What is the cost of financing? You can never get rid of all uncertainty, but you can reduce it," he says.
Apparently, investors agreed that greater certainty would be a good thing. They sent stock prices soaring, with the Dow Jones industrial average rising nearly 300 points on Wednesday.
Randall Stephenson, the CEO of AT&T and chairman-elect of Business Roundtable, issued a statement saying Congress' approval of the budget should serve as a foundation for more compromises.
"Our leaders can build upon this agreement by moving forward with comprehensive tax reform, lifting the debt ceiling, reforming immigration and passing updated Trade Promotion Authority legislation to advance U.S. trade agreements," he said.
The budget deal, put together by Sen. Patty Murray, D-Wash., and Rep. Paul Ryan, R-Wis., should help prevent a government shutdown for the next two years. The House passed it last week, and President Obama says he will sign it into law.
Still, there's plenty of uncertainty ahead. Congress will have to approve an omnibus appropriations bill to implement the bipartisan budget accord. Lawmakers are expected to vote on that in January.
Then in February, Congress has another opportunity to generate jitters: It could get into another big battle over raising the debt ceiling. In October, during a partial government shutdown, lawmakers agreed to suspend the debt ceiling until Feb. 7.
Getting clarity on the government's borrowing authority may take some doing, given that Republican leaders are likely to demand big concessions in exchange for their cooperation.
On the issue of monetary policy, the Fed ended its meeting Wednesday by starting the process that will get interest rates back to more normal levels.
When the financial crisis hit in 2008, the central bank took many extraordinary steps to ensure that interest rates — both long and short — would stay extremely low. The goal was to stimulate business expansion by making it easy to borrow.
Fed policymakers have been saying for months that as soon as the economy got strong enough, they would start to back off the easy-money efforts. But no one knew exactly when that would happen.
Fed Chairman Ben Bernanke said Wednesday that the Fed would make "a measured reduction" of its extraordinary steps at each of its eight meetings in 2014.
Stuart Hoffman, chief economist for PNC Financial, wrote that the Fed's "announcement is the start of a very long process of normalization in interest rates."
So with two steps taken, one by Congress and one by the Fed, the U.S. economy may have begun the long walk back to a more normal level of certainty. Or maybe it's a more certain level of normality.