Full US government shutdown likely, could impact Fed

September 21, 2023: A full, lengthy shutdown of the U.S. government is “likely” at the end of the month and could make the Federal Reserve reluctant to raise interest rates. This isn’t solely due to economic slowdown concerns but also because a prolonged shutdown could limit the central bank’s access to critical inflation data. The lack of funding may affect key agencies, such as the Departments of Labor and Commerce, responsible for producing crucial reports on price trends.

Bank of America’s U.S. economist, Aditya Bhave, explained that if the shutdown persists for a month or more, the Fed would need essential economic activity and price pressure information for its November meeting, making it challenging to make informed decisions. While a lengthy shutdown isn’t anticipated, Bank of America suggests that the prudent approach for the Fed would be to hold off on rate hikes in November. The possibility of a December rate hike remains uncertain and would depend on inflation trends.

The Fed heavily relies on data from the Departments of Labor and Commerce, particularly the personal consumption expenditures costs and consumer price indexes, to assess inflation. The central bank’s decision-making process would require more data in November.

Despite these considerations, market expectations lean toward believing that the Fed has completed its rate-hiking cycle. As measured by the CME Group’s FedWatch, the Fed funds futures market indicates a less than 30% probability of a rate hike in November, with some suggesting the possibility of rate cuts starting by June 2024.

 Bank of America, however, anticipates one more rate hike, potentially taking the key borrowing rate to a target range of 5.5%-5.75%, depending on the duration of the government shutdown and inflation trends.

The conclusion of the Fed’s two-day meeting is expected to maintain current interest rates, according to market consensus.