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Eighteen days ago, a shutdown of the US government led to the furlough of most public employees, apart from those in critical positions. This situation has resulted in the suspension of significant reports following the ADP report, including delays in the SEC‘s decisions on ETFs and various other matters throughout October. The pressing question that remains is how the government shutdown will impact the Federal Reserve’s upcoming interest rate decision at the end of the month.
Fed Left in the Dark
The Federal Reserve is expected to announce its interest rate decision at the end of October, but critical economic reports cannot be published due to the shutdown. Recent reports indicate that the limited inflation increase has been overshadowed by significant employment weakness, strengthening market expectations in favor of an interest rate cut.
However, crucial inflation figures scheduled to be released this Wednesday have been delayed. If the shutdown ends, these figures may still be published next week, potentially on October 24th, which is critical for the Fed. The Department of Labor is recalling some staff to ensure this report’s publication by that date. On Tuesday, Powell remarked on the difficulties they face in decision-making without access to these reports.
Matthew Luzzetti, Deutsche Bank’s chief US economist, suggests that the easiest path is waiting for the shutdown to end with a 25 basis point cut this month. He noted, “The lack of data makes it really difficult to press for a majority supporting more aggressive action. This leaves you with the easiest path for October being another [quarter-point cut].”
We have witnessed similar events over the last 30 years three times. In 1996, data was unavailable due to a 21-day shutdown. The 16-day government closure in 2013 resulted in data shortages, leading the Fed Chairman at the time to express their reluctance to “fly blind.” While the Department of Labor wasn’t impacted during the 2018 shutdown, this is the third occurrence.
Interest Rate Decision and Cryptocurrencies
Turning our attention to the cryptocurrency investors’ perspective, current data indicates job contractions and limited inflation growth. So, even forthcoming reports might only highlight further job contractions and minimal inflation increases at best. However, the opposite could also happen, meaning these delays can be perceived positively for the crypto sector due to “supportive recent outlooks.”
On the other hand, after the October interest rate decision, the Fed will announce its final rate decision of the year in December. By then, it’s almost certain the shutdown will have concluded, allowing the Fed to evaluate the data from September, October, and November when issuing its final decision.
Expectations suggest that rate cuts will persist during the October and December meetings. Although blind this month, the Fed’s decisions will favor cryptocurrencies. The primary concern will be the Fed’s pace in continuing rate cuts into the new year, which will become clearer at the December meeting with a review of three months’ data.
In summary, the outlook for cryptocurrencies from the Fed’s perspective is supportive, but unexpected figures from consecutive reports could increase volatility.
