We saw a rally at the end of last week, in spite of Friday’s unequivocally positive employment data that bolstered the case for tapering sooner rather than later. Today the stock market has risen again, even after James Bullard, the President of the St Louis Fed, said that he considers a small taper to be an appropriate response to advances in unemployment.
Mr Bullard said that ‘a small taper might recognize labour market improvement while still providing the committee the opportunity to carefully monitor inflation during the first half of 2014.’ He also said that inflation ‘continues to surprise to the downside’. This suggestion that the Fed might pause after beginning to taper perhaps sweetens the pill for the stock market, especially considering how stubbornly low inflation has remained in recent months.
The Fed will no doubt be wary of hazards on the road ahead posed by Washington, with fiscal policy having acted as a constraint on economic growth this year and with more potential wrangles up ahead. There have been reports today that lawmakers in Washington are drawing close to a 2014 budget deal, though, which could remove the risk of another shutdown.
Reportedly, leaders in Congress’ official budget committee are close to striking a deal to fund the government for the year ahead and might pass the measure before Congress adjourns for the year.