A.Estiot, Senior Economist at BNP Paribas, on U.S political deadlock, new Fed's Chief, QE tapering

It is very difficult to give a definite answer after looking at the way U.S leaders are dealing with the shutdown. At the moment what we can see is that there are enough Representatives, including Republicans, to pass a clear continuing resolution in order to fund the government. However, John Boehner, the Speaker of the U.S House of Representatives, is blocking the law and is not allowing it to be discussed in the House. When you see this kind of situation, it is not possible to be 100% confident that they will be able to reach an agreement. 

Furthermore, the problem is that the number of Republicans and conservative thinkers, who are spreading the idea that a failure to raise the debt ceiling would not be a catastrophe, is rapidly increasing. They believe that the Treasury will still be able to prioritize the bills it chooses to pay, for instance pay the interest on the debt and roll over the maturing debt without paying other bills. Some see that as a really good idea, as it would limit the growth of the indebtedness, because it would bring more confidence from private investors. In my opinion, all this is completely untrue.  When you read reports from both the Treasury and the White House, you see that they all agree on the fact that it would be catastrophic, and actually the Treasury does not have the power to choose which bill it gives priority to pay. That would be unconstitutional for the Treasury or the White House to fix this kind of priority between the different bills. 

On top of that, there are computer problems due to automatic payment for certain bills. Therefore, the Treasury would have to shut down payment system and to come up with another one that would be linked with people deciding on which bill to pay first. To my mind, the decision not to raise the Federal debt ceiling would have severe consequences. A few months ago I would have told you that they would manage to find a way to avoid it, now I am much more doubtful.

It is a very positive fact that Janet Yellen is to be the next and actually the first chairwoman of the Fed, as she always has been taking part and been highly involved in decision making with regards to the monetary policy setting, and what is more important, always has been in agreement with the current Chairman Ben Bernanke. Needless to say, it gives continuity to the U.S monetary policy. Definitely, she has taken part in setting all the recent rules and decisions on monthly purchases of securities. There are no more doubts that those rules are there to stay. 

Ms. Yellen is seen to be more dovish than Bernanke but I am doubtful about that. However, what is important is that the financial markets believe that she is. Thus, everything else being equal it will tend to lower the long term yield as well as put a little bit downward pressure on the U.S Dollar.

It is very likely amid the recent development in the U.S. economy and the softness in the labor market especially during the summer period. Even though there was a rebound in business confidence; unfortunately it was not strong enough. Moreover, industrial production, new orders and retail sales were not peaking up. Fed members were very clear that they want to see an improvement in the outlook for the labor market, but for this outlook to brighten there should be a remarkable rebound in activity. Although business confidence rose by the end of the summer, with the partial government shutdown and the risk about the possible default of the U.S., the next release is likely to be negative. We expect the activity to soften even more than during summer, and in order to see a real rebound we have to wait at least two or three months with the hypothesis that the Congress is to find a long lasting solution. Taking all that into consideration and adding slow inflation, which currently is around 1%, there are reasons actually to increase the amount of securities the Fed purchases every month. However, they would not do that because they are still doubtful about the long term severe consequences in terms of financial stability. Nevertheless, most probably we can expect tapering early next year, bearing in mind that for the moment the first press briefing of the FOMC meeting is planned for March 2014. Therefore, that could be a possible date and I would expect J.Yellen to take care of the tapering.