Progress in Congress

With government produced economic reports postponed by the shutdown, the budget and debt ceiling discussions in Congress dominated the economic news again this week. The gridlock in Washington and the signs of progress have caused large movements in the stock market, but the impact on mortgage rates has been much more limited, and mortgage rates ended the week just a little higher.

Of the two, the debt ceiling has much more serious potential consequences for the economy and financial markets than the government shutdown. With the debt limit rapidly approaching, on Thursday the two parties raised investors' hopes for a deal. It was reported that both sides might agree to a short-term deal which would extend US borrowing authority until November 22. Such a deal would remove the threat of a disruptive default in the short-term, and it would give Congress more time to reach a longer-term compromise. It is not known at this time whether the deal would end the government shutdown. On Thursday, stocks recovered all their losses from earlier in the week and turned positive for the week.

Investors almost universally misread the Fed's signals leading up to the September 18 Fed meeting, when the Fed decided not to taper its bond purchase program. As a result, investors were very eager to see the detailed Minutes from that meeting, which were released on Wednesday. The vote at the meeting was 9 to 1 in favor of maintaining the current level of bond purchases, but the Minutes revealed that Fed officials had very mixed feelings about whether to taper and that it was a "relatively close call". Overall, Fed officials wanted to wait for greater improvement in the labor market before reducing monetary stimulus. In addition, they expressed concern that the rise in interest rates that had been seen and the unresolved questions about fiscal policy could slow economic growth.


The Week Ahead

Investors will continue to follow the budget and debt ceiling discussions next week. If the shutdown is not resolved, most of the economic reports scheduled for next week will be postponed, including the Consumer Price Index, Industrial Production, and Housing Starts. Unaffected by the shutdown, the Fed's Beige Book will be released on Wednesday and the Philly Fed index will come out on Thursday.