The Federal Reserve (Fed) once again faces the threat of an internal shock to the United States economy, as already happened in the second quarter during the negotiations to raise the public debt ceiling that put the country on the verge of suspension . of payments. Once again, the fight between Republicans and Democrats once again puts the Biden Administration on the ropes in the face of a budget blockade that can lead to the so-called ‘government shutdown’, that is, Washington temporarily lowers the blinds and sends home the federal officials with their jobs in limbo but suspended with pay.
The issue is central to Jerome Powell’s central bank and its “data-dependent” approach to setting monetary policy. After resuming the interest rate hike to 5.5% on July 26 – after the pause in June – many observers saw another rate increase likely this year, but the scenario ahead advised caution. The reason is simple: if there is a federal shutdown on October 1, the Fed will not have economic indicators to evaluate at its Halloween monetary meeting (October 31-November 1) because the agencies that prepare them would be inoperative and temporarily unavailable. .
Blind rate hike
“A shutdown is more likely to happen than not, and the compressed time frame and lack of roadmap reinforces that view. While markets have historically taken shutdowns in stride, this one could differ in that it clashes with several other headwinds for the economy (resumption of student loan payments, auto workers strike, rising gas prices, etc.) and the consumer, who has so far been resilient. “There would be no economic data published or compiled. “All of this goes to say that a government shutdown may have a greater impact than many assume, given the backdrop,” explains Libby Cantrill, PIMCO’s public policy officer.
The blow to the economy depends on time but it is fully quantified that if it occurs, as happened in 2013 or partially in 2019, it will eat up several tenths of the American GDP. The government shutdown prevents the federal Administration from spending a single dollar and not even paying payroll, although once normality is restored, officials receive the amount due during that period. Four years ago, deferred federal spending totaled more than $18 billion in the partial shutdown, according to the Congressional Office (CBO).
“During a shutdown there would be no economic data collected or published during the shutdown period, including no GDP data, no payroll data, and no inflation data, and even when the Government reopens, the primary economic data will be delayed. All for say that the Fed – which has emphasized how data-dependent it currently is – would be flying blind in November when the next Fed meeting occurs (after this week) and could be reluctant to raise rates,” Cantrill recalls. The Pimco expert recommends focusing on the division within the Republican Party to detect a possible agreement.
The potential threat in Washington has become a visible reality this week: the macro strike of dozens of miles of employees of Ford, General Motors and Chrysler (Stellantis) that is gradually spreading to more factories in the US. Financial sources warn about the economic blow and the distortion of the September manufacturing indices, and estimate that about half of the automobile production in the country may be affected by the strike. The Fed, therefore, will have to cautiously estimate the effect of this situation on the economy at a time when more and more experts recommend that it carefully measure its steps.
Inflation, in focus
Matthew Morgan, head of fixed income at the Jupiter AM manager, still has room for new monetary tightening. “In recent weeks, the market narrative has once again shifted from optimism that inflation has been resolved to fear of a reacceleration in inflation driven by strong consumer data and the recovery in oil prices. Resilience Consumer demand has been surprising, and this period of volatility and uncertainty could be with us for some time,” says the manager.
“It may be an increasingly outdated view, but there is a risk that traditional economic rules will apply: we have already added more than 5% to the cost of capital for consumer credit, mortgages and businesses. ‘Long and variable lags’ are proven to exist, and probably growing longer. Soft landing complacency existed before every previous hard landing. The lessons of history, along with slowing inflation and some signs that the consumer “Running out of money means central banks should pause here and wait to see the impact of what they have already done rather than risk seriously damaging the economy,” Morgan warns in his pre-meeting reflection.
In this sense, Jack Janasiewicz, portfolio strategist at Natixis IM Solutions, considers it “unlikely” that the Fed can continue to support its monetary policy. “The most recent data on consumer price inflation should be taken with some perspective. The disinflation process will never be linear and it is expected that it will be a series of ups and downs and that the long-term trajectory will be downward. As for to rate increases, if you look at market expectations, it seems that they are moving away. Federal continues to tighten its monetary policy,” he explains.