The Federal Reserve has made it clear that its remaining two 2023 decision 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 that some of that data the Fed might base any interest rate decision on will be delayed, disrupted or even absent.
Key U.S. economic data releases such as inflation reporting and unemployment statistics and many other releases are provided by the government. However, this research is generally are not considered essential. Therefore, economic analysis and reporting, like many other non-critical government services, would be expected to stop were the government to shutdown on October 1.
Now, a government shutdown may be averted and even if it 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 occurs, it’s highly likely to have been resolved by that date. Importantly, the Fed will continue to operate during any shutdown, that’s 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 economic impact too, beyond the impact on economic data releases. It’s unlikely that a shutdown could trigger a recession by itself, but it’s still likely to prove a temporary drag to growth and create various disruptions as 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 rising rates. It could, at least, push any potential hike back to December when the Fed has a clearer sense of the economic picture once any disruption to economic releases might presumably be resolved.
A government shutdown would have many unpredictable economic impacts. One of those is likely making life more complicated for 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 that the Fed is becoming less likely to move rates up in November, the increasing chance of shutdown might, in part, be why.