Shutdown Or Not, The Fed Abides

Here’s an additional reason to be thankful for the independence of the Federal Reserve. Since the Fed does not receive funding through the congressional budgetary process and is largely self-funded through the interest on its massive government securities portfolio, plus its many other activities, we don’t have to worry that this week’s Federal Open Market Committee meeting will fall victim to the partial government shutdown.

But how much will actually happen at the meeting that can be expected to move the financial markets?

One thing we do know is that Fed Chair Jerome Powell will hold a press conference after the meeting ends at 2:00 EST. Last summer Powell announced that he will hold a presser at the end of each of the Fed’s 10 scheduled meetings, not just every three months.

But it’s unlikely that the Fed will raise interest rates at the meeting, after Powell largely put the kibosh on that idea late last year, when under extraordinary pressure from President Trump and just about everyone investor within reach of a microphone he and his Fed colleagues surrendered and said “no mas” to any more monetary tightening for a while.

How far that extends into the future is anyone’s guess, but it appears likely that the Fed won’t be raising rates before its end-of-July meeting, and maybe not even then. For one thing, we have the effects of the aforementioned government shutdown on the U.S. economy to consider.

Last week, Kevin Hassett, the chairman of the White House Council of Economic Advisers, warned that first-quarter GDP growth could be “very close to zero” if the shutdown, now over a month old and the longest in history, extended through the whole quarter. While he may be right about the length of the closure – who knew that it would have lasted this long? – it seems a bit of a stretch that economic growth would fall to zero. Let’s not forget that since he works for the president, his comments might be a little politically motivated to encourage Chuck and Nancy back to the negotiating table.

Coincidentally, the first estimate of fourth-quarter GDP is scheduled to be released on Wednesday morning, a few hours before the Fed meeting ends, but that announcement might be delayed due to the shutdown. The latest forecast from the Federal Reserve Bank of Atlanta is calling for 2.8% growth in Q4, while the New York Fed has it at 2.6%. That would be down from 3.4% in Q3 and 4.2% in Q2. Of course, the government was still up and running then.

It’s just a little hard to believe that the federal government being partially – emphasis on that word – closed would have that large an effect on overall economic growth to drive it down to zero. After all, the banks are open, private businesses are running, consumers are spending money – and most important of all, those Social Security checks keep arriving. With all due respect and sympathy for the government employees affected, most of the economy is humming along like nothing is amiss.

Perhaps we’re all taking our cue from the White House and the Congress. If a government shutdown is such a serious matter, why aren’t they acting like it is? So why should anyone else be worried?

(As an aside, I’m somewhat surprised by the lack of phony panic about a supposed “default” on federal government debt, as there usually is during government shutdowns. I guess there have been so many shutdowns over the past 25 years that people have gotten wise that such an eventuality is never going to happen).

Still, the shutdown will undoubtedly throw some sand into what already appears to be a slowing economy. The New York Fed’s preliminary GDP growth forecast for the current quarter is 2.2%, while the Atlanta Fed hasn’t posted its forecast yet, pending more data. A 2.2% rate would be about half of what it was just six months ago. The steep drop in oil prices should keep already tame inflation well under control.

So where does this leave the Fed?

Partial government shutdown or not, we can probably rest easy that Powell and the rest of the Fed aren’t going to throw any surprises our way today. We are likely to get the same old bafflegab about “patience” and “data dependency” and the like and little hint of when to expect the next interest rate increase, but probably not for a while. But a slowing economy and mild inflation should clearly have most of the Fed’s attention.

That being the case, the next few months should be relatively free of volatility in the financial markets, certainly nothing like what we saw late last year before Powell calmed the waters. The markets like what the Fed is doing – i.e., nothing – and Powell and his colleagues have learned they need to keep it that way.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.