Government shutdown unlikely to stop March rate hike, Deutsche Bank says

The impact of a congressional failure to strike a deal on funding federal operations “should be insufficient” to significantly lower the odds of a 25 basis-point rate hike that traders are betting will occur in March, Deutsche Bank’s Matthew Luzzetti and Brett Ryan wrote in a note to clients on Friday.

The odds of an increase that month — which would take the benchmark federal funds rate to 1.25 percent to 1.5 percent — were 73 percent on Friday afternoon, slightly higher than the day before, according to CME Group’s assessment of trading in interest-rate futures. And follow-through on the other two hikes that the Fed signaled for 2018 is “still the safest bet at this point,” said Mark Hamrick, senior economic analyst for Bankrate.com.

That’s welcome news for lenders like Bank of America and Citigroup, which typically benefit from passing rate increases on to borrowers more quickly than the depositors whose money is used to fund loans. Bank of America’s net interest margin, which measures the gap, widened 12 basis points to 2.37 percent at the end of last year.

A hike would be only the sixth since the Federal Reserve began raising rates in 2015 from the near-zero range where they were held for seven years following the financial crisis. With inflation accelerating, though not yet at the Fed’s 2 percent target, and unemployment at just 4.1 percent for the third straight month, monetary policymakers will likely feel comfortable enough to act, Deutsche said.

History would support such a calculus: The U.S. economy still grew 4 percent despite the shutdown in late 2013, during former President Barack Obama’s second term. Minutes of the monetary policy committee’s meeting that October showed that members viewed the effects as “temporary and limited,” Deutsche noted.

While the jobless rate might be pushed up if the number of government employees affected now were similar to the 800,000 in 2013, that would be temporary, as it was with the fallout from Hurricane Harvey’s strike on Houston last fall, Hamrick said.

Still, a failure by Washington to keep the government running “hurts the economy and the many people who are directly or indirectly reliant on the government for their livelihoods,” he said. Government spending accounts for 6.5 percent of the U.S. economy, and each week that federal offices are closed would trim growth by 10 basis points, estimated Shawn Golhar, an economist with Barclays Plc.

A shutdown might also make it more difficult for the Fed to accurately assess the health of the economy, since the Bureau of Labor Statistics wouldn’t be releasing monthly employment data, nor would the Bureau of Economic Analysis be publishing its inflation gauges.

“This could prove to be a problem if the shutdown spans weeks,” Deutsche Bank said. Private data, of course, would still be available, as would the Labor Department’s weekly jobless claims.

Since 1988, a total of five government closings have lasted from a single day to as long as three weeks, including the 16-day event in 2013, Bankrate’s Hamrick said.

If one dragged on long enough at this time of year, it might delay tax refunds, prompting the Fed to reconsider its stance, the lender cautioned.

“The tax filing season officially opens on Jan. 29,” Luzzetti and Ryan noted. “Should a shutdown stretch meaningfully beyond that point, the delay to tax refunds could cause policymakers some concern as it may impact consumer spending.”

Consumers, of course are the single largest driver of the U.S. economy, accounting for 69 percent at the end of October, according to data from the Federal Reserve Bank of St. Louis.