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Government shutdown is eroding confidence in the political process: Fed's Kashkari

Brian Sozzi
Editor-at-Large

The prolonged government shutdown is doing nothing to engender confidence in the U.S. political process among overseas counterparts and domestic constituents.

“I think the government shutdown is eroding confidence in our political system to reach compromises and to come together and make decisions,” Minneapolis Federal Reserve president Neel Kashkari told Yahoo Finance. “The longer this goes on people are understandably concerned — obviously you have 800,000 workers that aren’t getting paychecks and that has huge implications for them and their families and direct implications in the U.S. economy. Critical services such as TSA [not functioning] could also have a big effect on the U.S. economy.”

Added Kashkari, “This is not just about national parks being shut down, there are critical government services vital to our economy [not functioning] — and that’s why I think investors have become increasingly concerned about how this goes.” Kashkari said the government shutdown hasn’t yet had a material impact on economic trends in his district of Minneapolis.

So far, the stock market has largely overlooked the yawning government shutdown. The Dow Jones Industrial Average and S&P 500 are up 3.8% and 4.4%, respectively, this year as investors have taken their cue from veiled promises by the Fed to pause with their interest rate hikes. A belief that the U.S. and China will resolve their trade differences soon has also boosted investor sentiment.

But as the battle between President Donald Trump and top Democrats on the funding for a proposed border wall along Mexico rages on — suggesting a longer term government shutdown is likely — the economic impact could start to get the attention of investors.

The government shutdown — which is now the longest in history at more than four weeks — could easily have a greater impact to first quarter U.S. economic growth than feared. Not only are 800,000 government workers not getting paychecks, but government contractors have also been ensnared in the debacle. That could trigger a ripple effect in many parts of the consumer economy following a rather upbeat holiday shopping season.

The Trump administration said this week the partial shutdown would chop off 0.1% from growth every week. Previously, the administration believed the shutdown’s impact was a 0.1% hit to growth every two weeks.

And the shutdown could even weigh on the wealthy investment banking community.

“For IPOs, in particular, for sure if we don’t see the ability to get approval from the SEC on IPOs, and to a lesser extent, some of the M&A deals that need approvals from government agencies, it will be problematic in the ability to see those activity levels play out and fees be realized,” JPMorgan Chase & Co. Chief Financial Officer Marianne Lake said on a call with analysts this week.

Hold the tears for them, however.

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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