The leaders of the U.S. Senate from both parties reached an agreement to end the fiscal deadlock and to increase U.S. borrowing authority, and Republican leader Mitch McConnell said they want to pass the deal today. House Republicans signaled today that they will allow it to pass.

The yield on the 10-year Treasury note fell five basis points to 2.67 percent at 2:09 p.m. in New York. The Standard & Poor's 500 Index headed for its third-highest close on record, adding 1.2 percent to 1,718.10. The benchmark gauge of U.S. equities has advanced this month and is up 20 percent this year even amid the fiscal deadlock.

Businesses contacted by the Fed for the survey “generally remained cautiously optimistic in their outlook for future economic activity,” according to the report.

The concern about the shutdown was widespread across industries and regions, according to the Fed's report. Among manufacturers “there was little immediate disruption from the federal government shutdown” although “contacts were worried about the potential impact if the closing became prolonged.”

Background Checks

In the New York Fed district, an employment agency said “the government shutdown has hampered efforts to do background checks on prospective employees, whereas another contact indicates this has not been problematic thus far.”

Among retailers in the Philadelphia district “optimistic sales expectations” relied on the assumption that “the federal government shutdown does not extend beyond two weeks.”

The Minneapolis Fed noted tourism activity was “solid” even as government-funded tourism destinations were closed.

The Philadelphia, Richmond, Chicago, and Kansas City reserve bank districts reported that “growth slowed some,” while the other eight noted “similar growth rates in economic activity” as they saw during the previous reporting period.

The FOMC on Sept. 18 surprised investors after a two-day meeting by refraining from tapering $85 billion in monthly bond purchases. Economists predicted before the gathering that the committee would dial down monthly Treasury purchases by $5 billion while maintaining buying of mortgage-backed securities, according to a Bloomberg News survey.

The fiscal deadlock and suspension of economic reports mean the Fed probably won't start reducing bond purchases until next year, said Bluford Putnam, chief economist at CME Group Inc., the Chicago-based owner of the world's largest futures market.

“It's really low probability that the Fed would make any change in policy during a period of such uncertainty,” said Putnam, a former economist at the Federal Reserve Bank of New York. He cut his fourth-quarter estimate for annualized growth to 1 percent from 2 percent because of the government closing.

“We haven't had any employment data for a while and when we finally get some it's not going to have any quality,” he said, citing the lapse in data gathering and publication.

The FOMC has pumped up its balance sheet to $3.76 trillion and pledged to press on with so-called quantitative easing until the job market improves “substantially.” The unemployment rate was 7.3 percent in August according to the latest payroll report available before the government suspended operations.

Growth Rate

The world's largest economy expanded at a 2.5 percent annualized pace in the second quarter, beating economist estimates, after growing at a 1.1 percent pace in the first quarter.

Still, the outlook of U.S. consumers fell in October to a nine-month low, with the Thomson Reuters/University of Michigan preliminary consumer sentiment index declining to 75.2 this month from 77.5 in September.

Mortgage rates close to a two-year high are slowing gains in real estate, an engine for the current expansion. The average interest rate on a 30-year fixed home loan was 4.23 percent last week, according to Freddie Mac, compared with 3.35 percent in May.

Directors at the 12 Fed district banks said last month “ongoing domestic fiscal constraints and uncertainties” pose risks to the economy, according to minutes released yesterday summarizing the discussions.

As the biggest U.S. companies begin to report results for the third quarter, firms including Wells Fargo & Co., the largest U.S. home lender, have cited risks to the outlook from the budget impasse.

“A prolonged government shutdown and potential debt ceiling breach is unnecessary and troublesome and will likely create new needs for our customers and their families,” Wells Fargo Chief Executive Officer John Stumpf said in an Oct. 11 conference call with analysts.

Confidence among U.S. homebuilders fell more than forecast in October to a four-month low. The National Association of Home Builders/Wells Fargo index of builder sentiment decreased to 55 this month from a revised 57 in September that was weaker than initially estimated, the Washington-based group reported today.

The median forecast in a Bloomberg survey called for a decline to 57. Readings above 50 mean more builders view conditions as good than poor.

The previous Beige Book report, released Sept. 4, said Americans spending more on cars and housing helped the economy maintain a “modest to moderate” pace of expansion from early July through late August, even as borrowing costs increased.

Bloomberg News

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