US Government Shutdown ‘Likely,’ Fed May Pause Interest Hike: PIMCO

House Speaker Kevin McCarthy (R-Calif.) speaks to members of the media while walking through Statuary Hall at the U.S. Capitol in Washington on Sept. 18, 2023. Brendan Smialowski/AFP via Getty Images

The U.S. government may shut down by the end of the month and force the Federal Reserve to bypass a rate hike, according to investment management firm PIMCO.

Federal funding is set to run out on Sept. 30, after which the government may shut down. On Sept. 18, House Speaker Kevin McCarthy (R-Calif.) told reporters that he would be bringing two spending bills to the floor for consideration by lawmakers, including a stopgap bill demanding an 8 percent reduction in federal spending, which would extend the shutdown to Oct. 31. However, experts see little hope in the bills getting passed because of conflicts between lawmakers on the issue of spending cuts.

“If the government shuts down, there may not be a catalyst for it to reopen given the complicated internal dynamics of House Republicans,” Libby Cantrill, head of public policy at PIMCO, said in a note on Sept. 19, according to Reuters.

Within the GOP, there are disagreements regarding the content of the proposed stopgap bill.

PIMCO sees the potential of a full, lengthy shutdown of the U.S. government as “likely” by the end of the month and expects the event to prevent the Federal Reserve from raising interest rates in November.

Ms. Cantrill pointed out that a government shutdown would prevent the collection and release of key market data such as gross domestic product (GDP), inflation, and unemployment. This would hamper the central bank’s ability to accurately understand the position of the economy.

“The Fed—who has emphasized how data-dependent it currently is—would be flying blind” into its policy meeting scheduled for November, she said.

The September jobs report is due on Oct. 6, the September inflation data on Oct. 12, and the third-quarter GDP estimate on Oct. 26. The Fed meeting on interest rates is set for Oct. 31 to Nov. 1. Without these latest economic reports, officials won’t be able to decide whether to raise, hold, or bring down interest rates.

In a Sept. 13 post, Morgan Stanley also stated that a U.S. government shutdown on Oct. 1 “looks increasingly likely.”

“To avert this outcome, Congress would have to pass 12 separate bills to fund federal agencies by the end of the fiscal year on Sept. 30. However, lawmakers remain at odds over a host of issues, including proposals for new reductions in spending, the restoration of expired cuts to corporate taxes, and an expansion of the child tax credit,” the bank stated.

Consensus Nowhere in Sight

The White House is accusing “extreme House Republicans” of pushing the United States toward a government shutdown.

In a Sept. 20 statement, the Biden administration slammed the Republican stopgap bill, also known as a continuing resolution, calling it a “shutdown bill that doubles down on extreme, partisan proposals that can’t pass the Senate and will never become law.”

President Joe Biden addresses the 78th U.N. General Assembly at the U.N. headquarters in New York on Sept. 19, 2023. Timothy A. Clary/AFP via Getty Images

“Their bill ... makes devastating, indiscriminate cuts to food safety, education, law enforcement, housing, public health, Head Start, and child care, Meals on Wheels, and more,” it stated.

The White House warned that a shutdown would force military personnel and law enforcement to work without pay, endanger disaster response, undermine public health and environmental protections, undermine food safety, delay infrastructure projects, and deny capital for small businesses.

The continuing resolution was recently passed by the House Rules Committee. While Democrats are against the bill due to the spending cuts, many Republicans have also voiced opposition, including Reps. Andy Biggs (R-Ariz.), Marjorie Taylor Greene (R-Ga.), Tim Burchett (R-Tenn.), and Matt Gaetz (R-Fla.).

Rep. Michelle Fischbach (R-Minn.), who supports the bill, pointed out that the proposed cuts under the continuing resolution would only be in effect for a month.

“We need to remember what we’re trying to do is get us to a point where we can work on those 12 appropriations bills and have those discussions,” she said.

Shutdown Effects and Length

According to Morgan Stanley, a government shutdown may only result in “modest losses” in GDP.

“The 20 government shutdowns that have occurred since 1976 appear to have had limited impact on the economy,” the investment bank stated.

During the last government shutdown that took place in 2018–19, an estimated 800,000 federal workers went without pay for more than a month. The GDP only fell by 0.014 percent the following quarter, it stated.

“While investors may worry about financial and economic uncertainty, it’s key to note that government shutdowns are temporary—on average, they have lasted just over a week,” the bank stated.

However, the U.S. Chamber of Commerce believes that a shutdown, if it happens, could “likely be significant in duration.”

In a Sept. 18 post, the chamber pointed out that there has been a “decreasing willingness” on the part of the leveraging party to agree to reopen the government in the past shutdowns since 1995.

The 2018–19 shutdown lasted 35 days, which was two-thirds longer than the earlier record of 21 days in 1995–96.

“At the moment, there is no clear path to reopening the government should a shutdown occur,” the chamber stated.

This is due to multiple reasons, including the very tight margins in the House and threats by supporters of a shutdown to “utilize a ‘motion to vacate’ to attempt to throw the House into chaos.”

“On the other hand, the increasing need for disaster aid funding combined with the normal build-up of pressure during a shutdown could bring it to a quick end, but those pressures are likely to only change marginally from the conditions present at the outset,” it stated.

“Bottom line: In the current environment, as hard as it may be to avoid a shutdown, it would be even harder to get out of it. This points to an extended shutdown.”