US Government Shutdown Threat Builds in Post-Downgrade Fallout

A fresh fiscal showdown is brewing in Washington that threatens to complicate the Federal Reserve’s policymaking and strengthen Fitch Ratings’ warning that self-inflicted wounds are tarnishing America’s standing in the global economy.

Congress left for an extended August recess without resolving simmering conflicts over spending and hot-button social issues, raising the risk of a government shutdown when federal funding runs out after Sept. 30. It’s the latest case of brinkmanship over the national budget that fueled Fitch’s move to strip US debt of its prized AAA status last week — a landmark decision that’s caused hand-wringing across Wall Street and Washington.

The credit rating company’s determination has emboldened Republicans to call on President Joe Biden and congressional Democrats to yield to their demands for fresh spending cuts.

While the direct economic impact of a shutdown would likely be limited, it would come at “At a particularly inopportune moment,” warned Anna Wong, chief US economist for Bloomberg Economics.

The Fed will be making a key interest-rate decision in September and the increased likelihood of a prolonged shutdown could factor into that stance. During the 2018-2019 shutdown, many key economic indicators were delayed.

Meanwhile, some 45 million Americans with student loans will have to resume making payments in October, potentially dampening consumer spending, while the prospect of a disruptive UAW strike against automakers that month is very real. Add the fact that the impact of Fed rate hikes will peak in the autumn, according to Wong, and the seemingly unstoppable US economy faces fresh hurdles.

“A prolonged shutdown could make it even more difficult for the Fed. That’s why I think markets could be nervous,” said Gennadiy Goldberg, senior U.S. rate strategist at TD Securities. “It could lead to the Fed potentially missing a Fall pivot point.”

1995 Shutdown Contributed to Fall in Bond Yields