The FED: the US Federal Reserve, Washington DC
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A looming government shutdown could keep the Federal Reserve from raising rates in November, but not for the reason you might think, according to Bank of America.
Not only would the shutdown potentially slow the economy and make a rate hike a bad move, but a long deadlock would mean central bank policymakers have limited access to inflation data, the investment bank noted. That’s because unfunded agencies such as the Departments of Labor and Commerce would not produce important data reports on price trends.
“If the shutdown lasts a month or more, the Fed would essentially be blind at its November meeting, having learned very little about economic activity and price pressures since the September meeting,” said US economist Aditya Bhave of the Bank of America in a note. .
Although Bhave said a long shutdown is not expected if it lasts longer than a month, “we think it would be a sensible course of action for the Fed to remain on the sidelines in November. Could the Fed start hiking in December instead? That’s another close call, but we think a skip in November is more likely to mean the rate hike cycle has ended unless inflation clearly picks up again.”
The Fed relies heavily on reports from Labor and Commerce to gauge inflation.
In particular, it focuses on the price index of personal consumption expenditure of trade as a measure of the direction in which inflation will move in the longer term. Labor’s Consumer Price Index is a benchmark widely followed by the public and also appears in the Fed’s calculations.
While these are not the only inflation gauges used by central bank officials, their unavailability in November would complicate interest rate decisions.
To be fair, markets think the Fed is done anyway.
According to CME Group’s FedWatch measure, prices in the Fed Funds futures market point to less than a 30% probability of a final move higher in November. The instrument indicates that the central bank could start cutting spending in June 2024.
However, Bank of America expects the Fed to approve another rate hike, which would bring its key interest rate to a target range of 5.5%-5.75%. Bhave said if the shutdown lasts only a few weeks, the Fed would have enough time to gather data and likely raise rates again, although he said a hike would not be certain if inflation continues to moderate.
The Fed concludes its two-day meeting on Wednesday, with markets largely expecting interest rates to remain unchanged.
– CNBC’s Michael Bloom contributed reporting.
Correction: Another Fed hike would bring the key interest rate to a target range of 5.5%-5.75%. In an earlier version the range was displayed incorrectly.