Global Daily – Threat of a US government shutdown

by: Maritza Cabezas , Peter de Bruin

Global-Daily-Insight-23-September-2015.pdf (84 KB)
  • We expect Republicans and Democrats to reach an agreement and avoid a US government shutdown
  • A less likely scenario is that US Congress passes a continuous resolution to extend funding
  • Turkey’s central bank keeps monetary policy tight, though policy in Hungary stays extremely loose




New deadline approaching for a US government shutdown

Democrats and Republicans have longstanding differences on spending priorities. Despite the Republican majority, Republicans lack the votes to pass the spending bill they want in the Senate. If an agreement is not reached by September 30 when the Federal spending authority expires, then they will need to pass a continuous resolution to avoid a government shutdown. This allows funding to be extended at current levels and removes the urgency of Congress to resolve the differences for a set amount of time.


Issues in debate that could potentially cause a shutdown

One of the major issues in debate is Planned Parenthood and its funding. Republicans want to strip federal funding from this program, which Democrats support. On top of this, there are the usual differences, democrats want to increase the cap on spending in domestic programs for unemployment benefits and other welfare payments as well as education, infrastructure and environmental protection. Meanwhile Republicans are opposed to more domestic spending.


Economic impact of a shutdown

A less likely scenario of a shutdown of government agencies will cause some uncertainty, but we expect it to be short lived. In 1995 and in 2013, the economic impact of the shutdowns was not meaningful and was rapidly reversed in the next months. The major costs are related to the interruptions to business as federal employees that are not considered “essential” stayed away from work, for instance National Park Services. Moreover, in contrast to 2013, there is no risk of an overlap with the debt ceiling. Overall, the fiscal viability is more solid now than during the previous episodes and a shutdown is more likely to be avoided.


Fed’s rate decisions not influenced by shutdown threat

Chair Yellen mentioned during the press conference after the FOMC meeting last week that the threat of a shutdown “played no role” in the central bank’s decision to delay the rate hike. We think that this will not be a concern for the upcoming December FOMC meeting, since we expect Republicans and Democrats to reach an agreement beforehand.


Turkey’s central bank keeps monetary policy tight

Turkey’s central bank (CBT) kept its monetary policy rates unchanged and maintained a tight liquidity stance during its meeting. In response to the slide in the lira and high inflation, it has pushed interbank rates to the upper bound of its interest rate corridor. We think that the CBT will continue this policy, though expect policy rates to be raised as well when the Fed starts its tightening cycle and pressure on the lira intensifies.


Policy in Hungary and the Czech Republic extremely loose

The Hungarian Central Bank (MNB) kept its policy constant too. But, at 1.35%, policy is extremely loose. Inflation has started to pick up, but should remain below the central bank’s target for an extended period. Policy tightening will therefore most likely have to wait until 2016H2. The situation is more or less similar in the Czech Republic. The CNB is likely to keep policy also constant during this Thursday’s meeting. However, given the renewed fall in inflation, the CNB-board is likely to send a dovish message. In addition, it may discuss introducing negative policy rates to alleviate pressure on the FX floor and lessen the current sharp pace of FX reserve accumulation. That said, the sound economic performance should help inflation over time to pick up, and we would be surprised if the CNB opts for more stimulus.