The Fed is on course to change course in monetary policy and taper bond buys on September 18th. The chances of economic data to prevent tapering are minimal at this point. While the US economy is not shining, it continues growing steadily and so are jobs.
The private sector and the Federal Reserve have little left to do. The US government has room to act with the sequestration, but even with the fiscal austerity, the US economy looks stable and a high pace of bond buys can hardly make a difference at this point. In the few days left until the highly anticipated decision, there still is one more burning issue, which lies far from the shores of the United States: Syria.
US President Barack Obama failed to receive wide international backing for action in Syria at the G-20 meeting and is now focusing on garnering support in Congress. The debates will be held in the week beginning on September 9th. The patriotic sentiment during the week of 9/11 and the interests of various politicians towards their constituents will likely seal the approval, despite the brinkmanship in Washington.
While Republicans aren’t likely to avoid criticism on Obama, a majority will probably be found. In the time that passed since the alleged chemical attack in Damascus on August 21st until now, the US military made preparations, as did other armies in the region. When Congress approves action, the military can act quite fast.
So, there are some chances that the US will attack Syria before the Federal Reserve releases its statement on September 18th.
Potential Escalation and Fed reaction
Obama seems to want a limited strike that will show Syria that the use of chemical weapons is a crossing of red line – a move that will deter the regime from repeating this move.
However, it’s easy to start a war, but hard to know where it will end. If Syria or its allies (Iran or Lebanese Hezbollah) retaliate by attacking Israel, the US could act to defend its ally. Any counterattack could be followed by another one and the US could find itself involved in an all-out war in the Middle East.
A deep US engagement in the Middle East could pose a risk to the weak US economic recovery. Higher oil prices and resources directed out of the country could derail the recovery.
Real damage to the economy isn’t necessary to change the minds of Ben Bernanke and his colleagues: they could adopt a policy of “wait and see” in September, and wait for the clouds to clear.
What will happen?
It’s important to note that the chances of a quick escalation that will prevent QE tapering remain low, and probably come only from the Syrian crisis.
Apart from that, allowing for higher long term interest rates could be a wise thing to do as house prices are rising fast, and as aforementioned, the economy continues recovering.
What do you think?
Further reading: September offers potential for further dollar strengthGet the 5 most predictable currency pairs