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Wall Street Waits on Washington

Three questions pending in Washington are poised to roil markets: When will the Federal Reserve taper quantitative easing? When will the government shutdown end? and Will Congress fail to raise the debt limit? How these issues play out is likely to have lasting effects for a year or more.

Speculation over when the Fed will start tapering has been looming over markets since Fed chairman Ben Bernanke tipped his hand in May during his testimony before a joint congressional committee. Although the Fed surprised investors last month when it said that economic conditions did not yet support a reduction in its $85 billion in monthly bond purchases, the very next week Charles Evans, head of the Federal Reserve Bank of Chicago, confused matters further when he said that tapering could be announced as early as the next Fed meeting on October 29–30. Uncertainty about tapering could be exacerbated by turnover in membership of the Fed’s policymaking arm, the Federal Market Open Committee, including the departure of Bernanke, whose term expires in January.

Congress continues to be at a stalemate as it contends with the political fallout of the government shutdown. The partisans are digging in deeper than ever. The GOP had demanded the defunding of the Affordable Care Act, better known as Obamacare, even though the new health insurance exchanges officially launched on Tuesday, the first day of the shutdown.

The deadline to raise the debt limit is October 17. For every dollar the debt limit is raised, speaker of the House John Boehner has been demanding that government spending be reduced by one dollar — what has come to be known as the “Boehner Rule.” Congressional Republicans have shifted focus to the rest of a wish list of concessions, however, including a one-year delay of Obamacare and approval for the Keystone XL oil pipeline. As in 2011, the GOP is using the prospect of a government default as leverage.

President Obama says he will not negotiate on the debt limit. But keep in mind, however, that he had said as much in 2011, then struck a last-minute deal. He had a strong incentive to compromise two years ago: his reelection. The White House feared a refusal to deal would hurt the president’s prospects for a second term. Of course, that motivation is gone, although congressional Democrats face midterm elections in November 2014.

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