Bank of America notes that a US government shutdown would not only slow the economy but also make the Federal Reserve's interest rate hike a mistake.
A prolonged stalemate would limit Fed policymakers’ access to inflation data, and unfunded government agencies like the Labor Department and the Commerce Department would not produce important data reports on price trends.
“If the shutdown lasts a month or more, the Fed will essentially be flying blind at its November meeting knowing very little about economic activity and price pressures since its last September meeting,” said Bank of America economist Aditya Bhave.
While a prolonged US government shutdown is unlikely, if this assumption lasts longer than a month, the Fed is expected to continue to “act cautiously” in November. This means that the “hiking cycle” is over, unless inflation returns.
In addition, the Fed assesses the situation through the Commerce Department's personal consumption expenditures price index as a reference measure for long-term inflation. The Labor Department's consumer price index is a widely known measure and is also included in the Fed's calculations.
While these two factors are not the only inflation measures used by Fed officials, if they are missing in November, the situation will become complicated.
The probability of a final rate hike in November is less than 30%, according to the CME Group's FedWatch tool, which suggests the Federal Reserve could start cutting rates by June 2024.
However, experts from Bank of America expect the Fed to approve another rate hike, bringing the base lending rate to the target range of 5.5% -5.75%. According to expert Bhave, if the US government shutdown lasts only a few weeks, the Fed will have enough time to collect data and be able to raise interest rates again.
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