Under such a scenario, the near-term hit to the economy is largely avoided, but the need for fiscal consolidation persists – as indeed it does under any plausible scenario. A clear, consistent and committed medium-term U.S. fiscal plan, one that demonstrates how this consolidation will be achieved, would be helpful in mitigating a major uncertainty that would otherwise endure.
More positively, recent Fed actions have actually reduced uncertainty. Specifically, the Fed has provided greater certainty by indicating that its policy rate could be expected to remain at extremely low levels until mid-2015. It has also provided more certainty with respect to its reaction function, linking future unconventional monetary policy to substantial improvements in the outlook for the U.S. labour market.