The Federal Reserve has made it clear that its remaining two 2023 decisions on interest rates will be data dependent, with another rise in interest rates possible but not certain. If there is a government shutdown, there’s a real risk some data the Fed might base any interest rate decision on will be delayed, disrupted or even absent.
Economic Data
Key U.S. economic data releases such as inflation reporting, unemployment statistics and many others are provided by the government. However, this research generally is not considered essential. Therefore, economic analysis and reporting, like many other non-critical government services, would be expected to stop were the government to shut down on October 1.
Now, a government shutdown may be averted and even if one occurs, historically they have often lasted only a few days. Still, that may be enough to disrupt certain economic releases. During the first week of October, significant data on the jobs market would be disclosed, if the government remains operational. That includes the U.S. unemployment report on October 6. Also, the key Consumer Price Index for September would typically be expected on October 12.
The Fed’s Calendar
The Fed doesn’t plan to announce its next decision on interest rates until November 1. Even then, should a shutdown occur, it’s highly likely to have been resolved by that date. Importantly, the Fed will continue to operate during any shutdown because it’s funded by industry fees and not the government’s budgetary process.
However, the Fed typically likes to guide market expectations in the weeks leading up to a meeting via public speeches and other comments, and that process may be less robust if key economic data is delayed. In order to set interest rates, the Fed first needs a clear assessment of trends in areas such as unemployment and inflation.
The Economic Impact
Of course, a government shutdown will have its own impact on the economy, too, beyond the effect on data releases. It’s unlikely a shutdown would trigger a recession by itself, but it’s still likely to be a temporary drag on growth and create various disruptions. Many households face the prospect of delayed paychecks and many government services are paused, including some food assistance programs.
In that sense, a government shutdown might make the Fed more cautious in raising rates. It could, at least, push any potential hike back to December when the Fed has a clearer economic picture once any disruption to data releases presumably would be resolved.
A government shutdown could have many unpredictable economic impacts. One of those is likely complicating the Fed’s interest rate moves. The Fed would remain operational during any shutdown, but economic data would almost certainly be disrupted. Currently, the markets estimate the Fed is becoming less likely to move rates up in November. The increasing chance of shutdown might, in part, be why.
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