US government shutdown could impact Fed, warns PIMCO.
US government shutdown could impact Fed, warns PIMCO.
A Potential Government Shutdown Could Pose Challenges for the U.S. Economy
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The United States may face a full government shutdown at the end of the month, which could have implications for the Federal Reserve’s interest rate decisions, according to analysts at bond giant PIMCO. In a note released on Tuesday, PIMCO emphasized that a government shutdown is “likely” and highlighted the potential challenges it could bring.
Libby Cantrill, Head of Public Policy at PIMCO, expressed concern about the complicated internal dynamics of House Republicans, suggesting that if the government shuts down, there may not be a clear catalyst for its reopening. PIMCO, which oversees $1.79 trillion in assets, points out that the current funding for most U.S. government programs (except for the military and Social Security payments) expires on September 30. If lawmakers fail to pass a new budget by then, large portions of government functions would come to a halt.
Goldman Sachs estimates that a government shutdown would reduce U.S. economic growth by 0.2% each week it lasted. Although a government shutdown is not viewed as toxic to the economy as a default on debt, it still has implications. During a shutdown, the government would continue to make payments on Treasury bonds and other forms of debt, but other key market data, such as gross domestic product, unemployment figures, and inflation data, would not be collected or released. This would cloud the ability of central bankers, including the Federal Reserve, to accurately gauge the strength of the economy.
Moreover, a shutdown would occur simultaneously with the resumption of student loan payments, rising gasoline prices, and an auto worker strike, all of which could potentially increase the economic impact of furloughing nonessential government employees. Cantrill warns that this confluence of events could have a significant effect on the economy.
Furthermore, a government shutdown would affect the Federal Reserve’s policy meeting in November. With the central bank’s current emphasis on data-dependency, a lack of crucial economic data due to the shutdown would leave the Fed “flying blind,” as Cantrill puts it. This could complicate the decision-making process regarding interest rates and other monetary policies.
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While past government shutdowns have had a relatively small impact on U.S. stocks, with the S&P 500 experiencing minor fluctuations, the potential disruptions caused by this shutdown could generate greater challenges. According to CFRA Research data, the S&P 500 has fallen by an average of 0.4% in the week leading up to a shutdown and gained a total of 0.1% over the duration of all shutdowns since 1976.
Capital analysts, on the other hand, expect a quick resolution to the potential government shutdown. Nonetheless, the uncertainties surrounding this issue highlight the need for lawmakers to find a timely and effective solution and to prioritize the stability and growth of the U.S. economy.
In conclusion, the U.S. faces a potential government shutdown at the end of the month, which could have significant implications for the economy. The shutdown may leave the Federal Reserve reluctant to raise interest rates in November due to the lack of key economic data. With other economic factors, such as student loan payments and rising gasoline prices, coinciding with the shutdown, the impact on the economy could be magnified. While past shutdowns have had limited effects on the stock market, this particular shutdown presents unique challenges. It is crucial for lawmakers to prioritize resolving this issue promptly and to consider the potential consequences on the stability and growth of the U.S. economy.
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