Cautious Fed adds to year-end drama

The intense interest on when the Fed will hike rates for the first time in nearly a decade will now likely fall alongside intense Washington battles over a host of other key economic issues, including the debt limit and extending a host of tax provisions.

While economic drama has been no stranger in Washington in recent years, the mess of contentious agenda items looming with just weeks to go in 2015 could be the worst of them all.

“I’ve been doing this since 1978, and I really think this is the most log-jammed legislative agenda I’ve seen,” said Steve Bell, a longtime Senate Budget staffer now with the Bipartisan Policy Center. “It’s a full year’s agenda trying to be crammed into something like 10 weeks.”

Fed officials want to raise interest rates before the end of the year, but when the central bank passed on the chance to do so at Thursday’s meeting, that left them with just two more meetings before the year is out to pull the trigger.

And both of those powwows will likely come right in the midst of intense congressional haggling over any number of key economic issues.

Lawmakers are currently focused on avoiding a government shutdown at the end of September, but that fight is really just a precursor for what awaits in the final months of the year. Assuming Congress averts the shutdown immediately looming, that fix will likely just buy time to fight over the issue for a few months more. And on top of that, lawmakers will also have to tackle several other contentious matters at the same time before the year is out.

Fed Chairwoman Janet Yellen said Thursday that while she acknowledged the case could be made to raise interest rates now, the combination of economic and market turmoil across the globe and slow-growing inflation gave the Fed the sense that it could wait a bit longer to provide a bit more economic support.

But that now means the Fed could be weighing an interest rate move intensely watched by financial markets could come right in the midst of a hugely uncertain fiscal fight in Washington.

For months, there have been questions about whether the Fed will be able to finally begin raising interest rates for the first time since the financial crisis without upending the steady, if not spectacular, economic recovery.

But while the Fed weighs a host of factors, Yellen made clear Thursday she expects Congress will not be one it has to mull.

“It’s the responsibility of Congress to pass the budget, to fund the government, to deal with a debt ceiling so that America pays its bills,” she said. “We have a good recovery in place that’s really making progress and to see Congress take actions that would endanger that progress, I think that would be more than unfortunate. So, to me that’s Congress’s job.”

The big question now is whether Congress can live up to Yellen’s expectations, with no clear path forward on how to avoid the imminent shutdown, let alone address the larger issues just over the horizon.

Lawmakers are generally expected to eventually pass a short-term continuing resolution to keep the government funded by Sept. 30, which would buy them enough time to strike a longer compromise that could do away with the sequester caps limiting funding.

That longer-term funding bill could end up being paired with another critical economic priority: addressing the debt ceiling. The U.S. reached its $18.1 trillion borrowing cap in March, and has since then relied on maneuvers from the Treasury Department to buy space under that limit to pay the bills.

Treasury Secretary Jack Lew has said those tools will be exhausted likely by the end of October, at which point Congress will need to free up more borrowing space, never a politically popular move, particularly with Republicans.

Add to that sundry other leftover items on the agenda, including reauthorizing the highway trust fund, a battle over whether to revive the Export-Import Bank, and a host of expired tax provisions looking to be renewed, and it was already going to be a scramble.

But many of those measures cost money, requiring Congress to either come up with spending cuts or tax hikes elsewhere to pay the tab, or swallow legislation that increases the deficit — a move that would surely be challenged by conservative Republicans.

Throw in the intensifying 2016 presidential race to further complicate the politics, and there are major questions swirling around matters of huge economic importance. After all, the 16-day shutdown of 2013 cut into economic growth by $24 billion, according to analysis from Standard & Poor’s.

“This economy is plagued by a lack of confidence as much as anything else,” said Bell. “For the average American, this could be another example that these guys really cannot do anything in Washington. And I think that would have economic consequences.”

The Fed said it steered clear of raising rates on Thursday because market turmoil driven by global questions abroad left a few questions unanswered. With a slew of questions pending in Washington, Yellen acknowledged the Fed might never have all the answers it wants.

“Of course, there will always be uncertainty,” she said. “We do our darndest to pull together the best analysis we can and to exchange views and to arrive at committee decisions.