Congress Acts, the Federal Reserve Doesn’t

The U.S. House of Representatives passed a two-year budget deal.

On Wednesday, the U.S. House of Representatives passed a two-year budget deal that would prevent a repeat of the ill-advised game of chicken that Congress played with the debt ceiling in 2011. The uncertainty about whether the United States would default on its debts four years ago was enough to upset investors worldwide, considering that the United States is still the sine qua non of world’s economy. That resulted in a short-lived but distinct weakening of the already weak post-recession recovery. Most parts of the economy were affected, including the budding commercial real estate recovery. Fortunately, Congress didn’t go over the edge, and soon the summer of ’11 was just another hiccough on the long road to recovery.

The House deal, passed 266-167, raises the debt ceiling until a new president and Congress will be in office in early 2017, and is expected to pass the Senate before the federal government would be obliged to default early next month. The bill also sets federal spending levels for the next two years, essentially allowing the sequester to quietly fade away, since the new spending levels surpass the sequester caps, increasing spending in the next two years by $112 billion. Federal spending, which has been creeping downward as a percentage of GDP, will at least quit dropping, perhaps to the benefit of overall economic growth, which would be a good thing for most real estate markets.

Also on Wednesday, news from the Federal Open Market Committee that isn’t really news: no one expected an increase in interest rates, and that’s what the central bank delivered. As usual, it also didn’t make any promises about the next meeting of the committee, which will be in December. The FOMC’s statement once again characterized U.S. economic growth as “moderate.” That seems to mean not bad, but not good enough for an interest rate shock.

“Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft,” the FOMC statement noted. “The pace of job gains slowed and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year.” The Fed went on to say that it sees “the risks to the outlook for economic activity and the labor market as nearly balanced, but is monitoring global economic and financial developments.” That is, the global economy is among the wildcards for the domestic economy, and a disturbance anywhere in the world has the potential to keep interest rates where they are in December.