scorecardThe Fed will definitely be done tightening if there's a government shutdown, top Morgan Stanley economist says
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The Fed will definitely be done tightening if there's a government shutdown, top Morgan Stanley economist says

George Glover   

The Fed will definitely be done tightening if there's a government shutdown, top Morgan Stanley economist says
Investment1 min read
  • The Federal Reserve could be about to call time on its rate-hiking campaign, according to Morgan Stanley's top economist.
  • That's because a government shutdown could rob the central bank of key economic data.

The looming government shutdown boosts the odds that the Federal Reserve calls time on its war against inflation, according to Morgan Stanley's chief US economist.

Ellen Zentner said Friday that the likelihood of the central bank raising interest rates again in November will fall if a political deadlock in Washington means that government agencies can't provide it with key economic data like the monthly Non-Farm Payrolls report.

"In monetary policy making, uncertainty tends to lead to policy paralysis," she told Bloomberg's "What Goes Up" podcast.

"If it's a full government shutdown, then you don't really get any of the government data," Zentner added.

"And so if we're lacking data that the Fed can officially sink its teeth into, then that's going to lead to an inability to make a decision about the path for rates. The lens of the Fed becomes foggy."

Congress will shut down next weekend if lawmakers are unable to strike a budget deal, with hardline Republicans calling for tighter spending controls.

Millions of federal workers will be furloughed if they can't reach an agreement by midnight on Saturday, September 30.

The shutdown could impede the Fed's policy decision-making capabilities as it weighs up whether to crush inflation for good with further rate hikes, or call time on its tightening campaign in a bid to prop up the US labor market. Around 40% of traders expect the central bank to hike borrowing costs again before the end of this year, according to CME Group's Fedwatch tool.

While the Fed not raising rates again would likely be a cause for celebration for investors, Zentner warned that any uplift to the economy could be canceled out by the negative impact of a government shutdown.

The US's GDP growth is likely to fall by 0.2 percentage points for every week the stand-off drags on, she said.




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