The Federal Reserve and questions over tapering of its asset purchases are obviously currently taking all the focus in financial markets. Better guidance on the central bank?s bond buying is likely to be given at the next FOMC meeting on 17-18 September when we still expect tapering to start. After that, financial market participants are likely, at least for a while, to shift their attention to the continuing fiscal soap opera in Washington DC. The debt ceiling is clearly the most important fiscal issue in H2 2013. In case of no agreement to raise the debt ceiling, the US government defaults. The final deadline for raising the debt ceiling is most likely in October or November. (The deadline is a moving target dependent on the projected federal budget deficit). Moreover, to avoid a government shutdown Congress will have to pass a temporary funding measure, a so-called continuing resolution, before the current authority expires on 30 September. The reason is that Congress ? once again ? seems unlikely to pass a budget before the new fiscal year starts on 1 October. Once again a group of Tea Party-aligned senators ? like the potential presidential prospects Rand Paul of Kentucky and Ted Cruz of Texas ? are pushing fellow Republicans in Congress to oppose raising the debt ceiling unless federal spending is cut. However, because fighting over the debt ceiling has proven to be a popularity-losing effort, our expectation continues to be that these fiscal issues will be solved on time with relatively little drama. Even in case of political drama, we would expect the fight to be short-lived and any impact on the economy to be minimal. Thus, we see only a low probability of a disruptive debate as in 2011 on the debt ceiling, which led S&P to strip the US of its triple-A rating, or in late 2012 on the fiscal cliff issue. Still, enacting a second increase of the debt ceiling with no other policy changes attached will probably be more difficult than it was earlier this year. Hence we could see some short-lived market volatility in the run-up to a (possible new 11 th -hour and 59 th -minute) political deal later this year. A timeline of key events related to the impending fiscal debate is provided in the table below. US fiscal policy – timeline of key dates (click to enlarge)
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