US Government shutdown - another Fed deterrent?

With the beginning of a new fiscal year less than two weeks away and no funding authorization in place, there is a growing chance of a Federal government shutdown. Congress will also have to increase or suspend the debt ceiling within the next 1.5 month as the Treasury is projected to exhaust so-called 'extraordinary measures' at some point in October or November.

"We review the impact of the 1995 and 2013 shutdowns and of the 2011 debt- ceiling debacle on the economy and Fed policy. We conclude that the two government shutdowns created uncertainty, but their ultimate impact on economic activity was very modest", says Societe Generale

In contrast, the debt ceiling standoff of 2011 - which culminated with a downgrade - left a more visible mark on the data. No matter how immaterial in terms of their economic impacts, government shutdowns create uncertainty and thus influence Fed decisions.

"We already view the odds of an October liftoff as low and a government shutdown could lower them further. Although funding issues should be resolved by the December FOMC meeting, there is a small chance that the fiscal standoff extends into the end of the year (i.e. due to a temporary continuing resolution), creating another deterrent for the Fed",added Societe Generale