By Andrew Moran
A U.S. government shutdown would potentially disrupt the financial markets by limiting regulatory oversight and preventing companies from going public or raising offerings, Securities and Exchange Commission (SEC) Chair Gary Gensler has warned.
If Congress fails to approve funding legislation that President Joe Biden can sign into law by midnight on Sept. 30, the federal government will shutter, furloughing tens of thousands of workers and disrupting various services.
Under such a closure, the Wall Street watchdog could furlough 93 percent of its staff, meaning the SEC would have “a skeletal staff” to conduct elementary market oversight, Mr. Gensler told lawmakers during a House Financial Services Committee hearing on Sept. 27.
That, he noted, would affect the U.S. stock and bond markets on many fronts, including stopping publicly traded firms from issuing new debt to fund or expand their businesses.
“The public won’t have somebody, really at full force, overseeing the market or companies that want to go public,” Mr. Gensler said. “I would say if a company were deciding to go public or raise offerings, they’d want to go effective before Friday if they’re ready to. If not, they might be in a sort of subliminal state where they can’t access the markets.”
He added that only senior staff could respond to any significant interruption to the capital markets or a possible emergency that affects property. However, the agency would still accept information from the public, be it complaints or tips, during a government shutdown.
‘Kneecapping’ Capital Markets?
Mr. Gensler was grilled by several House Republicans, with Rep. Andy Barr (R-Ky.) comparing him to former figure skater Tonya Harding because he is “kneecapping” capital markets.
“With all due respect, Mr. Chairman, if the U.S. capital markets are a gold medalist, you are the Tonya Harding of securities regulation because you are kneecapping the U.S. capital markets with the avalanche of red tape coming out of your commission,” Mr. Barr stated during the hearing.
He accused the SEC chief of trying to stop capital from being directed to fossil energy, effectively functioning as a climate regulator.
“Let’s be honest, we know what’s going on,” he said. “You’re trying to ‘scarlet letter’ fossil energy. I know you say you’re not. But we got the joke. Everybody knows what you’re doing.”
However, Mr. Gensler rejected the idea that the SEC is in the business of employing climate change regulation.
“We’re not a climate regulator,” he stated. “It’s a matter of investors making investment choices. And for some companies, investors are getting disclosures, and we’re trying to bring some comparability to those disclosures.”
House Financial Services Committee Chair Patrick McHenry (R-N.C.) accused Mr. Gensler of being “reckless” as it relates to rulemaking, congressional accountability, the lack of a capital formation agenda, and a “crusade against the digital asset ecosystem.”
“It’s time for you to consider the lasting consequences your actions have on the SEC’s reputation,” Mr. McHenry said in his opening remarks. “While your time in this role may be temporary, the repercussions of your actions may be permanent for the agency.”
Shutdown Could Minimize Data
A government shutdown would affect the Bureau of Economic Analysis (BEA), the Bureau of Labor Statistics (BLS), and the Census Bureau. As a result, the closure would temporarily suspend the release of major economic data. In the event of a shutdown, the upcoming publication of the September jobs report, the consumer price index (CPI), the producer price index (PPI), and consumer spending would be postponed.
Even alternative private sector readings, such as the ADP National Employment Report, prices paid inside the Institute for Supply Management’s (ISM) purchasing managers’ index (PMI), and the Indeed Job Postings Index, would be delayed.
However, since it is a partially self-funding agency, the Fed would continue to submit economic data, policy statements, and other widely watched reports.
That said, a shutdown would potentially leave data-dependent Federal Reserve policymakers directing monetary policy without comprehensive information.
“We would just have to deal with” less data, “and it’s hard for me to say in advance how that would affect that meeting,” Fed Chair Jerome Powell told reporters during the post-Federal Open Market Committee (FOMC) meeting press conference last week.
To Hike or Not to Hike
A shutdown could disrupt the U.S. economy and restrict the flow of data, forcing the Federal Reserve to conclude its rate-boosting cycle, ING economists say.
“Given the lack of clarity on the state of the economy it too would strengthen the case for the Fed holding interest rates steady again in November,” ING economists wrote in a research note. “This would give more time for the economic slowdown we anticipate to emerge and with core inflation likely to continue moderating, makes it all the more likely that the Fed’s hiking cycle is already over.”
They noted that a prolonged shutdown might lead to a shrinking economy in the fourth quarter.
According to the CME FedWatch Tool, the futures market expects the Fed to leave interest rates unchanged at the rate-setting Federal Open Market Committee’s November and December policy meetings.