The looming threat of a U.S. government shutdown in October could impact the Federal Reserve's future monetary policy decisions, as stated by Jerome Powell, Chair of the Federal Reserve. A shutdown could hamper the availability of critical data, including employment and inflation figures, which play a substantial role in the Fed's decision-making process.

If Congress fails to agree on federal funding before the end of the government's fiscal year on September 30, nonessential federal activities, including the collection and distribution of government data, would cease until a consensus is reached. A prolonged shutdown commencing from October 1 could delay the release of key economic reports such as the September jobs report due on October 6, and the September consumer price index numbers set for October 12. Third-quarter estimates of gross domestic product collected by the Bureau of Economic Analysis scheduled for release on October 26 could also be affected.

Cody Parkinson, a spokesperson with the Bureau of Labor Statistics, confirmed that data-related activities would stop until funding is restored. This raises challenges for Fed officials who are due to make an interest-rate decision at their meeting from October 31 to November 1. Without this data, Fed officials might refrain from increasing rates in November and possibly consider raising rates again in December or early in 2024 if subsequent data supports further tightening.

This situation is not unprecedented as Congressional gridlock led to similar delays during the federal government shutdown in 2013 that lasted for 16 days. The potential for a shutdown to affect data collection to an extent that it impacts the Fed's decision-making process would require it to last at least three to four weeks.

In case of a shutdown, the Fed could rely on private-sector figures such as the ADP employment report and unemployment insurance claims data. However, uncertainty caused by a shutdown and its potential impact on growth may still favor a pause in rate hikes for November.

Goldman Sachs economists estimate that each week of a government-wide shutdown could reduce economic growth by about 0.2 percentage points, but growth would increase by the same cumulative amount in the quarter following reopening. Despite these challenges, investors should not assume that the central bank might stop increasing rates, as there is always the December meeting where officials should have sufficient data to inform their decision.

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