Financial markets are focused on the future – especially the year 2024 – due to the uncertainty of when the US Federal Reserve (FED) will reduce interest rates. The North American central bank’s projections are more important than its current decision, as investors seek to understand the direction of interest rates in the coming year. Because? Because despite the expected economic slowdown in 2024, it has proven to be stable with higher interest rates.
Besides, The United States Congress must reach an agreement before October 1 on the federal budget, which created anxiety. It is true that government shutdowns or ‘lockdowns’ have historically not had a significant impact on the markets. However, Janet Yellen, Treasury Secretary and former FED Chair, emphasized the importance of maintaining economic strength without unnecessary risks.
Although some sectors – such as defense companies and government contractors – may be affected by government shutdowns, markets in general are influenced by macroeconomic factors such as quarterly corporate results and interest rates rather than temporary political events.
Since 1976 there have been twenty federal government shutdowns – with an average duration of eight days – although the maximum is 34 days in 2018-2019. During such ‘lockdowns’, the S&P 500 experienced a mixed performance with an average return of 0%, ie no impact.
There is the possibility of a one-month extension to start the federal government’s fiscal year, which will give more time to reach a budget agreement. HOWEVEROr, it would also create a new deadline of November 1 – adding to market volatility., because this is the only date of the possible new and probably last rate increase by the Federal Reserve. A prolonged government shutdown can have a temporary impact on the economy, with estimates suggesting that each week of shutdown will deduct approximately 0.2 percentage points from GDP growth, even if this activity the economy recovered after the opening of the government.
Uncertainty about fiscal policy is another factor to consider, because The FED monitors its movements in real time and the government shutdown may limit access to official data. This could affect interest rate decisions with the upcoming September employment report and the September consumer price index among the first to be affected.
On November 1, the next meeting of the FED
Although the Federal Reserve has other sources of information – such as state data and private surveys – they are not exhaustive of fiscal data. The next interest rate decision will be announced on November 1, but without timely data the FED can choose to wait. Futures markets are now pricing in a roughly 33% chance of a quarter-point rate hike at that meeting. However, a prolonged government shutdown could further reduce these difficulties.
In summary, Financial markets are looking ahead, with a focus on FED interest rates and the US federal budget. Although government shutdowns can create short-term uncertainty, they have historically had a limited impact on markets and the overall economy remains the most influential factor.