Fed Could Increase Bond Buying to Help Economy

It is impossible to gauge what the shutdown cost the economy in terms of GDP growth and employment. Certainly the next monthly jobs report, and perhaps the one after that, will reveal some increase in joblessness among government employees and firms that rely on government spending. The range of damage to gross domestic product among forecasts runs from zero to as high as several tens of a percent. And because the overall improvement in the economy may have lost momentum from mid-year, the effects of the shutdown could be magnified.

It is open to debate whether the $85 billion Fed asset program has worked at all. Clearly the members of the Fed’s board believe it has, although there has been a public splintering among them about how long the purchasing program should remain. That debate boils down mostly to the simple issue of whether unemployment will stay fairly high or will come down toward 6% relatively quickly.

The hope of a fast improvement in the jobs situation has begun to evaporate. There will be another battle over the federal budget in Congress, and it already has begun. The debt limit could be reached again as early as March. Another government shutdown may begin in late winter. Once again, hundreds of thousands of federal workers could be temporarily sidelined. The Fed will take into account the chance that the damage done in the past several weeks could be duplicated or even magnified in three or four months.

The $85 billion a month asset purchasing program could be increased in the face of more “headwinds.” A majority of Fed members may think that by mid-2014, GDP growth will slip back toward nil and unemployment could begin to tick higher. At that point, the Fed will be left with only one weapon — an increase in the use of the one it already has.