US Avoids Shutdown Crisis... But Fear of 'High Interest Rates' Continues

U.S. President Joe Biden attended and delivered a speech at the Congressional Black Caucus (CBC) Phoenix Awards Dinner held in Washington DC on the 23rd of last month (local time).
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The US Congress, both the House and Senate, approved a temporary budget bill allowing the federal government to continue operations for 45 days, easing fears of a shutdown (which involves suspension of some government functions and federal employee pay). However, concerns about a shutdown have not been completely resolved, and with the Federal Reserve's (Fed) ongoing tightening stance, market uncertainty is expected to persist for the time being.

According to Bloomberg on the 1st (local time), investors breathed a sigh of relief as Congress passed the 45-day temporary budget bill the day before the deadline for next year's budget.

The temporary budget bill proposed by Republican House Speaker Kevin McCarthy was passed in the House plenary session on the 30th of last month (local time) with 335 votes in favor and 91 against, about nine hours before the US federal government shutdown. Subsequently, President Joe Biden signed the temporary budget bill passed by the Senate just before midnight, postponing the US federal government shutdown crisis for 45 days.

If this temporary budget bill had not passed, the US federal government would have faced an inevitable shutdown due to a default on debt amounting to $31.4 trillion. In that case, delays and suspensions in the release of major economic indicators could have negatively impacted not only financial markets but also the Fed's monetary policy.

The temporary budget bill did not include the Ukraine aid budget, which faced strong opposition from Republicans, but accepted President Biden's request to increase disaster relief funding by $16 billion. Amid bipartisan consensus to avoid a shutdown, McCarthy's significant concessions to secure Democratic votes were seen as decisive.

However, concerns about a US shutdown have not been fully resolved. Although Congress has gained 45 days until the main budget bill is processed, significant differences remain between the parties over issues such as Ukraine aid.

The International Finance Center stated, "President Biden insists that the Ukraine aid excluded from this temporary budget must be included in the main budget, so there is a possibility that shutdown concerns will resurface during subsequent negotiations."

Jerome Powell, Chair of the U.S. Federal Reserve (Fed)
[Photo by Yonhap News]

Even if shutdown fears are alleviated, concerns about prolonged Fed tightening remain. In fact, many analyses suggest that the Fed's hawkish (monetary tightening preference) stance and high interest rates will be the most important variables going forward.

The Fed has announced it will maintain a tightening monetary policy stance for a considerable period to stabilize prices. In the economic projections (SEP) released after the Federal Open Market Committee (FOMC) meeting held on the 19th-20th of last month, the Fed forecasted the policy rate (median) to rise to 5.6% by the end of this year and then decline to around 5.1% by the end of next year. This implies that the US will experience high interest rates for a longer period than previously expected.

Especially since concerns about a federal government shutdown, which could have constrained Fed monetary policy, have been resolved, the likelihood of continued tightening has increased. The International Finance Center explained, "The market has analyzed that while shutdowns have not significantly impacted the US economy, they could have been an obstacle to the Fed's monetary policy operations, so this agreement is expected to ease the Fed's path."

This content was produced with the assistance of AI translation services.