Wall Street was left with its mouth wide open this week when US Federal Reserve Chairman Ben Bernanke finally revealed his cards only to show that he had nothing in his hand. Traders had bet big on the Fed tapering back its $US85 billion-a-month bond buying program following comments by Bernanke in June, which seemed to be preparing the market for a gradual withdrawal of its assistance.
The US sharemarket rejoiced upon hearing the news, the Dow Jones Industrial Average and the S&P 500 both closed at all-time highs on Wednesday, taking comfort that the Fed’s presence in the market would keep share prices higher.
So what has changed since Bernanke kicked off this tapering talk three months ago? Did everyone just misread his comments or does the man just have a brilliant poker face?
Unemployment has continued to fall, although its current rate of 7.3 per cent was still unacceptable, Bernanke said. Economic indicators have been weak but heading in the right direction.
What wasn’t on the horizon, however, was a looming government shutdown, which is now less than two weeks away unless Congress increases the debt ceiling from $US16.7 trillion.
Bernanke admitted that Fed members identified it as a reason to delay tapering its bond buying.
“This is one of the risks that we are looking at as we think about policy,” he said on Wednesday. "A government shutdown, and perhaps even more so a failure to raise the debt limit, could have very serious consequences for the financial markets and for the economy.
“I think it's extraordinarily important that Congress and the administration work together to find a way to make sure that the government is funded, public services are provided, that the government pays its bills and that we avoid any kind of event like 2011 which had, at least for a time, a noticeable adverse effect and on confidence on the economy,” Bernanke said.
Millions of dollars were wiped off the stock market in 2011 as Congress went right to the brink of defaulting on its debt.
Credit rating agency Standard & Poor’s downgraded America’s credit rating from AAA to AA for the first time ever.
It is a situation that US President Barack Obama says he won’t accept this time around.
“What I haven’t been willing to negotiate, and I will not negotiate, is on the debt ceiling,” he said on Sunday.
"If we continue to set a precedent in which a president is in a situation in which, each time the United States is called upon to pay its bills, the other party can simply sit there and say, 'Well, we're not going to … pay the bills unless you give us what we want' – that changes the constitutional structure of this government entirely.”
House Speaker John Boehner has argued that Obama must negotiate before the debt ceiling is raised.
"For decades, the White House and Congress have used the debt limit to find bipartisan solutions on the deficit and the debt," Boehner said at a news conference this week. "These types of changes were signed into law by President Reagan, Bush, Clinton and President Obama himself two years ago. So President Obama is going to have to deal with this as well."
Steve Bell, economic policy director at the Bipartisan Policy Centre, said the non-profit’s analysis confirms that the Obama Administration will only have about $50 billion of cash on hand by mid-October.
“I think there is a casualness about what a delay in paying the government’s bills will mean,” he told Business Spectator. “Only 18 per cent of the House and about a third of the Senate were around in 1995 when the Clinton Administration was shutdown so there aren’t a lot of people there who really know the consequences.”
It isn’t just markets and money-makers that suffer. During the Clinton shutdown 1.1 million federal workers were made to take leave without pay, another 500,000 were forced to work without pay, clinical trials were halted, health care hotlines were shut down, passport applications went unprocessed along with visa applications for foreigners.
“From a political point of view it wasn’t Clinton who got the blame, he went on to record a landslide election victory. It was the Republicans who suffered and I think Boehner is mindful of that,” Bell said.
House Majority Leader Eric Cantor has laid out the Republicans' legislative grab bag of wishes that they want attached to the bill to lift the debt ceiling, including a delay of the 'Obamacare' health law, an overhaul of the tax code and the approval of an energy pipeline running from Canada to the gulf coast.
Obama said overnight that he would veto any Republican legislation that sought to defund his health care law.
Despite all the bluff and bluster it is unlikely that the Republicans will allow the government to shutdown, if for no other reason than the fact that it would hurt them politically.
If US politicians continue their game of chicken the biggest loser will be investors as any prolonged uncertainty will hit confidence.
Bernanke said on Wednesday that the Fed would be unable to shield the market from the economic effects of a shutdown. Until a deal is struck it would have been a gamble for Bernanke to withdraw the Fed's stimulus and in contrast to those on Capitol Hill we saw this week that he is not a gambling man.
Mathew Murphy is a Walkley Award winning journalist based in New York.