US shutdown and debt ceiling issues could derail the Fed

The current US budget expires on 30 September and three possible scenarios loom. In the best case, a new budget is agreed running until 30 September 2015. More likely, however, is that a continuing resolution will be passed; kicking the can down the road to 11 December. Worst case, no agreement is found and the US government shuts down on 1 October. Preparing for all eventualities, agencies have already submitted contingency plans in the event of a shutdown. 

In a surprise twist, House of Representatives Speaker, John A. Boehner, announced his resignation Friday (leaving on 30 October). While a number of observers believe that this resignation increases the chances of a continuing resolution being agreed before 1 October and keeping the government open until 11 December, some fear that more fervent battles lie ahead. Come December, the issue of the debt ceiling will also hit the tapes as the Treasury by then is likely to have run out of "extraordinary measures" to avoid breaching the debt ceiling (at $18.113tn since 16 March 2015). The FOMC meet on 15- 16 December and if the fiscal issues are not resolved by then, this could add to the difficulties in terms of the "lift-off" debate. At present, markets price a probability of 42% for a December lift-off and just 18% for an October one.