Fed Chair Candidate Don Kohn Saw One 'Big Surprise' In Yesterday's Fed Announcement

Donald Kohn, an economic strategist for the Potomac Research Group, was surprised by the Federal Reserve's decision to delay tapering its stimulative large-scale asset purchase program.

Kohn, a former Vice Chair of the Federal Reserve, is considered one of the front-runners to be nominated for Fed Chair by President Obama.

PRG's Greg Valliere wrote in a note this morning:

Our colleague Don Kohn cautioned on a PRG conference call last week that there was a solid argument for waiting on tapering -- but like most observers, Don was surprised by the Fed decision. Mediocre economic data in the last few weeks, including soft inflation figures, surely played a role -- but the big surprise, Don said, was that Fed officials are beginning to worry about the fiscal fiasco.

"Bernanke says a factor that concerned the FOMC was upcoming fiscal headwinds," reported BI's Matt Boesler while covering Bernanke's post-FOMC meeting press conference. "A government shutdown, and perhaps even moreso, a failure to raise the debt limit, could have negative effects on the economy, which the Fed would have to take into account, because the central bank is charged with helping to keep the economy on course."

A potential "fiscal fiasco" has economists on Wall Street pushing back their expectations for the taper.

"The budget concerns suggest that the Oct. 29-30 meeting may be too soon for the Fed to begin the long-awaited tapering of quantitative easing as negotiations may still be ongoing," said UBS's Drew Matus on Wednesday evening.

But after that, there will be other calendar problems.

"Also, we believe the Fed would prefer to avoid a Dec. 17-18 meeting tapering that could be viewed as too risky in the midst of the key holiday shopping season," added Matus. "In our view, particularly now that any Fed warnings regarding a taper are likely to be discounted by market participants, there are higher odds of a disruptive sell-off in equity markets in response to a taper announcement. As a result, we now believe that the Fed will not begin tapering until the first quarter of 2014, with the January 28-29 FOMC meeting somewhat more likely than the March 18-19 meeting."

Stunning.