Markets at risk from US budget impasse, BoJ leaves monetary policy unchanged

Jeff Frankels thinks that the on-going US budget impasse may lead to sharp falls in financial markets.

Both sides in Washington are firmly dug in, and don’t plan to back down. If the politicians don’t get their act together and the debt ceiling is really not raised, the results will be very bad indeed...

It seems to me that this then leaves two possible outcomes: either the financial markets fall before October 17 and the Republicans respond by backing down or the financial markets fall after October 17 and the Republicans respond by backing down. Precedents for financial markets forcing such a reversal include the delayed congressional passage of the unpopular TARP legislation in the fall of 2008 and the delayed passage of an unpopular IMF quota increase 10 years earlier. (In the last debt ceiling showdown, in August 2011, default was avoided at the last minute; but the stock market fell sharply anyway, when S&P for the first time ever downgraded US debt from AAA.)

Investors, though, have shown little concern so far. US stocks rose on Friday, the S&P 500 rising 0.7 percent to trim the week's decline to just 0.1 percent.

Central banks elsewhere also remain sanguine.

Following the European Central Bank's decision on Wednesday to leave interest rates unchanged, the Bank of Japan held off fresh monetary easing measures at its monetary policy meeting on Friday.

The BoJ said that the economy was still “recovering moderately” while overseas economies were “heading toward a pick-up”.