If, as September comes to a close, you find yourself shaking your head over U.S. monetary and fiscal policy, the halting pace of the economic recovery and how the surging stock market continues to interpret all news as good news, you are not alone.

On Sept. 18, the Federal Open Market Committee emerged from two days of meetings to announce that – despite sending multiple strong signals since May that the time had come to begin the process of tapering – they were not yet ready to begin reducing their $85 billion per month in bond purchases. 

The decision was a shock to nearly every financial market commentator and the subject of much discussion in the days that followed.

The consensus going into the Fed’s meeting was that the foundation had been laid, a tapering of $10 billion to $15 billion was priced in, and that the Federal Reserve would take this opportunity to take the first baby steps toward unwinding its “extraordinary measures.” 

Instead they demurred. Their stated reason – the economy remains too fragile. 

At one level, you can’t argue the point. Gross domestic product growth remains anemic. 

An unemployment rate of 7.3 percent is still unacceptably high. And borrowing costs jumped on the mere mention of tapering in May.

But one cannot help wondering whether the situation has really changed that much, and if so, why did this Fed – which prides itself on transparency – not telegraph its intentions more clearly.

In our view, the greatest impediment to Fed action this month was the central bank’s concern over the fiscal budget battles which will play out between now and mid-October.
Without a continuing budget resolution by Monday, Sept. 30, the federal government will shut down. 

And by mid-October, Congress must act to raise the federal debt ceiling to avoid default. 

The Fed’s calculus had to consider not only that key fiscal policy decisions are imminent, but also weigh the likelihood that the decisions made would support economic growth. 

Hearing in recent days the same threats to force a default that brought turmoil to the financial markets in the summer of 2011, it chose to wait and see.

Over several successive meetings, and again this month, the Open Market Committee’s formal statement on monetary policy has included the declaration that “fiscal policy is restraining economic growth.” 

Fed policymakers usually avoid direct criticism of fiscal policy. But here they have made their view plain – repeatedly. 

In his press conference following the committee meeting, Fed Chairman Ben Bernanke urged Congress and the White House to reach a budget deal, warning: “Our ability to offset these shocks is very limited, particularly a debt limit shock, and I think it’s extraordinarily important that Congress and the [Obama] administration work together to find a way to make sure the government is funded, public services are provided, that the government pays its bills and that we avoid any kind of event like 2011 which had at least for a time a noticeable adverse effect on confidence and on the economy.”

It is time for quantitative easing to cease. But what is even more overdue is sensible, dependable fiscal policy. 

When the fiscal brinksmanship stops, we expect the economic recovery to accelerate and the Fed to begin tapering in earnest.