We’ve Seen This Movie Before: Hatzius on Debt Fight

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Sept. 18 (Bloomberg) –- Goldman Sachs Chief Economist Jan Hatzius discusses how the fear of a government shutdown is playing out in the markets. He speaks on Bloomberg Television’s “Market Makers.” (Source: Bloomberg)

Washington about the gridlock, frustration, the lack of negotiations going on and easy and a fear of the government shutdown, how is this playing out in the markets?

At the moment, while it has been increasing in terms of volume and attention over the last few weeks, you haven't seen any progress despite the fact we are getting into the second half of september and there is the debt ceiling looming.

It has increased but so far it's very much overshadowed by monetary policy, today's said meeting and the fed leadership discussion.

All of those things have been a much bigger driver of what's going on in the markets.

That seems fair, but our investors mistaken in being as sanguine as they appear to be with the s&p 500 near a record high and the russell 2000 hitting record highs, with the 10 year yield at 288 as we speak -- that doesn't suggest anyone expects any kind of debt ceiling or government shutdown inspired catastrophe.

That's probably right.

There is a certain degree of complacency.

Part of it is we've gone through these episodes before and backend 2011, there was -- back in 2000 11, there was a reasonable amount of complacency but then there was a lot of nervousness.

As we've gone through these episodes several times, people just say we have seen this movie before.

What about when we haven't seen this movie before?

It doesn't sound like negotiations or even close.

What if things are much worse?

Yes there is a government shutdown, national parks close and it will be tough to get a visa, but what does that mean for investors?

If it persisted for a long time, say more than a couple of days, it would be large enough to show up in the gdp numbers.

A day or so would not really be identifiable, but if it lasted for longer than that, you would start to see it.

The bigger one is the debt ceiling.

It's a further way but also drawing closer.

That's the one that's going to be scarier from the market perspective.

It's not the same kind of disaster scenario that you have with the debt ceiling issues.

That's the reason why it doesn't generate quite the same kind of excitement.

Before any of that happens, we will hear from the fed at 2:00 this afternoon.

You expect bernanke and company to announce a $10 billion reduction in the quantitative easing.

There's a range of opinions out there.

Based on what you heard from investors, what would constitute a surprise?

How big or small would have to be for markets to freak out?

No tapering would be a surprise.

The overwhelming majority of investors expects some degree of tapering and it's only a small number that don't have any tapering in their expectations for today.

I think that's a little different from some of the reports that have come out over the last couple of weeks.

Some have assessed a large probability that anything will happen today but investors are on the board with the idea that you get some tapering.

On the high side, anything above $15 billion would be a hawkish surprise.

There are more aspects to this meeting than just the decision on the asset purchase.

The fed is going to be giving us revised economic rejections . given your research to what's going on inside the fed, what are we likely to hear and how important is it going to be as we move ahead?

That's another very important aspect of what comes out today.

The piece of information people are probably most focused on is the projected federal funds rate for 2016. that's the first time after omc participants are going to tell us where they see monetary policy that far in the future and they are also forecast for the real economic variables.

They are clear the 2013 gross numbers will have to come down and the unemployment rate for the end of the year will have to come down and then there are smaller changes in the out years and inflation numbers.

The rate for 2016 -- our expectation is most of the participations will project something in the low twos but there will be a significant

This text has been automatically generated. It may not be 100% accurate.

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