The U.S. economy is entering an uncertain and perilous autumn, facing risks from abroad and from policymakers in Washington in what promises to be another tumultuous chapter in the nation's slow-going recovery.
The rising threat of a government shutdown -- and an even bigger battle over the nation’s borrowing limit -- looms large. So does China's dramatic slowing, as well as stock markets in the United States and around the world that have been experiencing gut-wrenching swings in recent weeks.
The newfound uncertainty promises to complicate the Federal Reserve’s efforts to start withdrawing its unprecedented support of America’s economic recovery -- a pullback that itself poses a challenge for the economy.
Top officials from the nation’s central bank are slated to meet in Washington this week to decide whether to raise the Fed’s target interest rate for the first time in nearly a decade -- a move that would signal the era of easy money unleashed during the Great Recession is finally coming to a close.
Already, many investors and economists believe the Fed will stay its hand this week in light of recent turmoil in international financial markets and mounting fears of a slowdown in the world economy. But the nation's central bank has said it expects to move sometime before the end of the year, an action that could upend global markets and raise interest rates on everything from mortgages to car loans.
At the same time, a new pocket of uncertainty is bubbling up.
Lawmakers have fewer than 10 working days -- including one that’s devoted to a visit from Pope Francis -- to come up with a plan to fund the federal government before the current budget expires at the end of the month. Senate aides have said they are considering legislation that would keep the government operating through the beginning of December, but no decision has been reached as to how or when they will release a bill.
Meanwhile, 30 conservative Republicans in the House have pledged to reject any spending bill that includes funding for Planned Parenthood, which has come under fire after an anti-abortion group released several edited films that appear to show employees there discussing the sale of fetal body parts. The group is large enough to ensure that House Speaker John Boehner will need votes from Democrats to avoid a shutdown.
“They’ve drawn a red line that I think they can only cross in the midst of a shutdown,” said Tony Fratto, founder of Hamilton Place Strategies and a former top aide to President George W. Bush. “That’s the only road they’ve left for themselves.”
That means Fed officials will head into a pivotal debate over the future of the American economy with little clarity on how the political brinksmanship in Washington will play out and whether it will undermine the recovery’s progress so far.
“They’re finding out the hard way that there’s no good time to quit a bad habit, and in this case the bad habit is easy money,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities. “It’s not going to make them any closer to raising rates.”
Boehner has said there was “widespread support” for both the stop gap bill and plans to negotiate with Democrats but leaders have not yet decided how to move forward. Boehner said he is considering ways to allow members to address their concerns with funding a group that provides abortions, including three separate investigations into the group, but he has not yet found a solution that is satisfactory to many in the conservative revolt.
But even if Boehner is able to avert a shutdown in October, there is no guarantee that negotiators will be reach a deal before the a stop-gap runs out. Democrats are demanding that any long-term budget deal must lift deep-cutting spending caps that were put in place as part of the 2011 budget control act, known as the sequester.
President Obama has said he would veto any spending bill that fails to increase both military and domestic funds. Republicans will be forced to decide between abandoning a year-long pledge to cut spending and the possibility of another shutdown in November or December.
That timing could coincide with a fight to raise the so-called national debt ceiling. The Treasury Department has estimated it will reach the limit on government borrowing sometime after the end of October -- unless Congress votes to raise it, setting the stage for another do-or-die political face-off.
The irony is that 2015 is expected to mark the first time in four years year that the federal government is actually boosting economic growth, rather than detracting from it, according to an analysis by Macroeconomic Advisers. But if a budget deal is not struck and the spending cuts outlined in a compromise report laid out this summer are enacted, the country could be headed back into recession, the report found.
Already, the economy has been growing, albeit slower, for a longer period than the post-World War II average. The unemployment rate, which peaked at about 10 percent just after the recession, is now about half that, and many analysts believe it is nearing its lowest sustainable level.
“A government shutdown would be one of the most ludicrous and self-inflicted wounds that i can imagine,” Labor Secretary Thomas E. Perez said in an interview, adding that lawmakers are “forming another circular firing squad.”
This is not the first time the nation's central bank has rumbled with Washington. Former Fed Chairman Ben Bernanke was outspoken in urging Congress to raise the nation’s borrowing limit in 2011. The next year, he coined the term “fiscal cliff” in 2012 to refer to the roughly $500 billion in scheduled federal tax increases and spending cuts that could have plunged the country back into recession.
And in September 2013, the Fed faced a momentous decision over whether to begin phasing out its trillion-dollar stimulus program known as quantitative easing. Antsy investors had sent market roiling in the months leading up to the meeting, causing mortgage rates to spike and financial conditions to worsen. In addition, Washington’s budget battles were heating up -- and eventually led to a 16-day government shutdown the next month.
The Fed back then opted to stay the course at its September meeting until the dust settled in December.
If the Fed delays raising its target interest rate this week, many analysts believe it could move when it meets in December instead. Indeed, Fed Chair Janet Yellen has explicitly stated that she expects the central bank will take that historic step this year.
But the prospect of a second budget battle combined with a fight over the debt limit this fall -- not to mention smaller but still controversial debates over the highway trust fund and tax extensions -- means the situation in Washington is likely to get worse by then, not better.
The direct economic impact of a government shutdown is expected to be small, assuming that it is short, federal workers are eventually repaid and a deal on the budget if finally achieved. Goldman Sachs estimated each week of a government shutdown shaves roughly 0.2 percentage points from economic growth, though the decline is generally made up the following quarter.
More important will likely be the volatility a poisonous political climate could inject into already skittish financial markets. Worse, the mounting rancor in Washington could carry over into difficult debates later in the year. Beyond approving a stop gap measure to avert a government shut down now, lawmakers must negotiate a long-term budget deal, fund federal highway and transit projects and lift the national borrowing limit to avoid what would be a catastrophic default.
Though the national economic impact may be muted, the hit to Washington would likely be greater, including lost revenue from the hordes of tourists and workers who descend on the region each day, said Jim Dinegar, chief executive of the Greater Washington Area Board of Trade.
“We’re far more than a petri dish here,” he said. “You’re talking about people’s livelihoods.”