The possibility of a U.S. government shutdown could have implications for the Federal Reserve’s decision on whether to implement another rate hike and may also impact the recent rally of the dollar, according to analysts.
Potential Shutdown Looms
The U.S. federal government is approaching a partial shutdown if Congress fails to pass necessary funding legislation before Sunday morning.
Delay in Inflation Data
A potential shutdown could lead to a delay in the release of crucial inflation data, which is highly significant for Fed policy makers evaluating the need for another rate increase. Edward Moya, Oanda’s senior market analyst, highlights the importance of this data.
Fed’s Recent Hawkish Pause
Last week, the Federal Reserve adopted a pause in their policy and decided to keep interest rates unchanged. However, officials anticipate a quarter-point interest rate hike by the end of the year. The Federal Open Market Committee is scheduled to hold its next meeting on November 1-2.
Limited Impact Expected
Moya suggests that if a government shutdown were to occur, it is unlikely to last long and therefore its impact on economic growth would be minor and potentially recovered afterwards.
Uncertainty in Dollar Trading
The coming days are expected to see volatility in U.S. dollar trading due to these circumstances. Over the past few weeks, the dollar has shown continued strength, with the ICE U.S. Dollar Index DXY, which measures the value of the dollar against a basket of major currencies, experiencing a 1.8% increase in the past month.
Impact of a Potential US Government Shutdown
The potential for a US government shutdown is causing concern among experts and analysts. One consequence of a shutdown could be a negative impact on the value of the dollar. According to Moya, a lack of inflation data may compel the Federal Reserve to maintain current interest rates rather than making a policy decision. This in turn could weaken the dollar.
Consumer spending is another area that could be affected by a government shutdown. Quincy Krosby, the chief global strategist at LPL Financial, highlights the potential pressure on consumer spending if a shutdown occurs. While Social Security and Medicare benefits are generally unaffected during a shutdown, there is uncertainty surrounding their timely distribution. As the deadline approaches, anxiety grows around this issue.
Moreover, aside from government benefits, numerous federal workers may face furloughs without pay. Although they have typically been entitled to back pay in such situations, delays in compensation could occur. Additionally, government-backed mortgage applications and small business loan processing may experience interruptions.
However, Krosby also considers the potential positive impact on financial markets. If consumer spending is significantly hindered by a potential government shutdown and investors expect the Federal Reserve to act sooner than expected in cutting interest rates, it may result in lower Treasury yields and bolster stock performance.
Overall, while a government shutdown has clear negative implications, it may also have some unintended positive effects on certain areas of the market.