Full Government Shutdown Could Stall Fed's Interest Rate Hike: PIMCO

An imminent full-scale shutdown of the U.S. government could likely deter the Federal Reserve from raising interest rates in November, according to a note from bond giant PIMCO on Tuesday, Reuters reported.

The Head of public policy at PIMCO, Libby Cantrill, suggests the complex internal dynamics of House Republicans could prolong a government shutdown if it happens.

Funding for the majority of U.S. government programs, excluding military and Social Security payments, is set to expire on Sep. 30. Failure to pass a new budget could result in a widespread shutdown of government functions.

Goldman Sachs strategists estimate a decrease in U.S. economic growth of 0.2% for every week the shutdown lasts.

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In spite of a shutdown, the government would continue making payments on Treasury bonds and other debts. A shutdown is not viewed as detrimental to the economy as a default on its debt, which Congress averted earlier this year by increasing the debt ceiling.

Speaker of the U.S. House of Representatives, Kevin McCarthy, intends to introduce two spending bills to the House floor this week, one of which is a short-term stopgap measure.

A government shutdown would impede the collection and release of key economic data, complicating the Federal Reserve’s ability to assess economic strength and “would be flying blind” into the central bank’s policy meeting in November, warns Cantrill.

Past shutdowns have had minimal impact on U.S. stocks, with the S&P 500 falling by an average of 0.4% in the week before a shutdown, and gaining a total of 0.1% over the duration of all shutdowns since 1976, according to CFRA Research data.

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