PIMCO predicts probable US government shutdown, potential interest hike pause.
The U.S. Government Shutdown Looms, Threatening Federal Reserve’s Plans
The U.S. government may face a shutdown by the end of the month, potentially derailing the Federal Reserve’s plans for a rate hike, warns investment management firm PIMCO.
With federal funding set to run out on Sept. 30, House of Representatives Speaker Kevin McCarthy is proposing spending bills that demand an 8 percent reduction in federal spending, which could extend the shutdown to Oct. 31. However, passing these bills seems unlikely due to conflicts among lawmakers over spending cuts.
“If the government shuts down, there may not be a catalyst for it to reopen given the complicated internal dynamics of House Republicans,” says Libby Cantrill, head of public policy at PIMCO.
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9/18/2023PIMCO predicts a full and lengthy government shutdown as ”likely” by the end of the month, which would hinder the Federal Reserve from raising interest rates in November.
The shutdown would prevent the collection and release of crucial market data, such as GDP, inflation, and unemployment, making it difficult for the central bank to assess the state of the economy.
The September jobs report, inflation data, and GDP estimate are all scheduled to be released in October, just before the Fed’s interest rate meeting. Without this data, officials won’t have the necessary information to make informed decisions about interest rates.
Morgan Stanley also believes a government shutdown on Oct. 1 is increasingly likely.
“To avert this outcome, Congress would have to pass 12 separate bills to fund federal agencies by the end of the fiscal year on Sept. 30. However, lawmakers remain at odds over a host of issues,” says Morgan Stanley.
Consensus Nowhere in Sight
The White House accuses “extreme House Republicans” of pushing the United States toward a government shutdown.
The Biden administration criticizes the Republican stopgap bill, calling it a ”shutdown bill” that includes devastating cuts to various sectors.
The White House warns of the negative consequences of a shutdown, including unpaid military personnel, compromised disaster response, and delays in infrastructure projects.
The continuing resolution has faced opposition from both Democrats and Republicans, further complicating the situation.
“We need to remember what we’re trying to do is get us to a point where we can work on those 12 appropriations bills and have those discussions.”
Shutdown Effects and Length
According to Morgan Stanley, previous government shutdowns have had limited impact on the economy, resulting in only modest losses in GDP.
During the last government shutdown in 2018–19, federal workers went without pay for over a month, but the GDP only fell by 0.014 percent the following quarter.
While government shutdowns are typically temporary, the U.S. Chamber of Commerce believes that if a shutdown occurs, it could be significant in duration.
The chamber highlights the decreasing willingness to reopen the government in past shutdowns and the potential for tight margins in the House to complicate the resolution process.
Overall, avoiding a shutdown seems challenging, and once it happens, getting out of it becomes even harder, pointing to a prolonged shutdown.
How could a government shutdown have broader implications for the economy as a whole
Asingly likely, with a 40 percent chance of it occurring. The investment bank believes that ”the big unknown here is how long it will last,” as lawmakers have shown in the past that they are willing to engage in protracted budget battles.
The potential impact of a government shutdown on the Federal Reserve’s plans for a rate hike cannot be understated. The central bank has been signaling for months that it is ready to start tapering its bond purchases and potentially raise interest rates in the near future. However, a government shutdown would throw a wrench in these plans and make it difficult for the Fed to take action.
The Federal Reserve relies heavily on economic data to make its monetary policy decisions. Without access to key market indicators, the central bank would be operating in the dark and would be hesitant to make any major moves. This would likely result in a delay in the Fed’s decision to raise interest rates, as officials would want to ensure they have a complete and accurate picture of the economy before taking action.
Furthermore, a government shutdown could also have broader implications for the economy as a whole. It would disrupt government services, delay payments to federal employees, and potentially lead to a loss of confidence in the government’s ability to function effectively. This could dampen consumer and investor sentiment and have a negative impact on the overall economy.
Given the current political climate and the disagreements among lawmakers over spending cuts, the potential for a government shutdown is a very real possibility. While the exact timing and duration of a shutdown are uncertain, its impact on the Federal Reserve’s plans and the wider economy could be significant.
It is crucial for policymakers to come to a resolution and avoid a government shutdown. The Federal Reserve’s ability to carry out its mandate and make informed decisions about monetary policy depends on the availability of timely and accurate economic data. A shutdown would hinder the central bank’s ability to fulfill its role and could have far-reaching consequences.
In conclusion, the upcoming U.S. government shutdown poses a significant threat to the Federal Reserve’s plans for a rate hike. The potential lack of access to crucial economic data would make it difficult for the central bank to assess the state of the economy and make informed decisions. Additionally, a government shutdown could have broader implications for the overall economy and erode confidence in the government’s ability to function effectively. It is imperative for policymakers to reach a resolution and prevent a shutdown from occurring.
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