According to Bank of America, a pending government shutdown may prevent the Federal Reserve from hiking interest rates in November, but not for the reason you may expect.
Not only might the closure impede the economy and make a rate rise unwise, but a prolonged deadlock would leave central bank officials with limited access to inflation data, according to the investment bank. This is because underfunded agencies such as the Labor and Commerce departments would not be releasing important data reports on pricing changes. After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
“If the shutdown lasts for a month or more, the Fed would essentially be flying blind at its November meeting, having learned very little about economic activity and price pressures since the September meeting,” Bank of America U.S. economist Aditya Bhave said in a note. After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
While a protracted shutdown is not predicted, Bhave believes that if it lasts more than a month, “we believe the prudent course of action would be for the Fed to remain on hold in November.” Could the Fed instead raise rates in December? That is another difficult call, but we believe a November skip suggests the hiking cycle has concluded unless inflation clearly increases again.”After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
To measure inflation, the Fed constantly monitors Labor and Commerce data. After a government shutdown, the Fed would be ‘flying blind’ in terms of interest rate decisions.
China’s economic model has ‘washed up on the shore,’ according to renowned investor David Roche.
It relies on Commerce’s personal consumption expenditures price index in particular as a barometer for where inflation is heading in the long run. Labor’s consumer price index is a widely observed public statistic that is also used in Fed computations.
While these are not the sole inflation measures used by central bank policymakers, their absence in November would complicate the rate decision.
To be sure, markets believe the Fed has already completed its mission.
According to the CME Group’s FedWatch gauge, pricing in the fed funds futures market implies a less than 30% chance of a final rise in November. According to the tool, the central bank might begin cutting by June 2024.
Bank of America, on the other hand, believes the Fed will approve another rate rise, bringing its benchmark borrowing rate to a target range of 5.5%-5.75%. Bhave said that if the closure lasts only a few weeks, the Fed will have ample time to collect data and likely increase rates again, though he added that a boost is not guaranteed if inflation continues to decline.
The Fed’s two-day meeting finishes on Wednesday, with markets anticipating rates to remain unchanged.
