Introduction
The inability of Republicans and Democrats in the U.S. Congress to agree on a federal budget has led to a government shutdown since October 1st. This situation, though anticipated, continues to create uncertainty about the stability of the world’s largest economy. The repercussions are evident in the surge of demand for safe-haven assets like gold.
Budget Debate Details
The budget debate in the U.S. Congress primarily revolves around healthcare, immigration, and cuts to social programs. Democrats demanded the renewal of healthcare subsidies for undocumented immigrants, medical subsidies, and the size of public administration. Meanwhile, Trump threatened to use the shutdown to reduce government apparatus and dismiss federal employees deemed “non-essential”.
Consequences of the Political Stalemate
The lack of consensus has resulted in a significant institutional paralysis in the U.S., with substantial economic and social effects. Over 800,000 federal employees are suspended, the release of economic data is delayed, complicating monetary policy decisions. There are increased risks in international negotiations or trade deals, and financial market volatility has surged.
Impact on Global Markets
Last week, the price of gold reached new historical highs, exceeding $3,900 per ounce. The VIX index (fear index) hovered around 17 points, indicating moderate volatility and market tension. The weakening dollar due to the government shutdown’s negative economic effects also reflects investors seeking protection against potential stock market declines.
The blend of a more accommodative monetary policy, institutional uncertainty, and financial volatility has created an ideal environment for gold to shine as a safe haven. This year, its price has risen by 48%, and it may continue to climb towards $4,000 per ounce if political and economic tensions persist, according to J.P. Morgan estimates.
Federal Reserve’s Limited Capacity
The government shutdown restricts the Federal Reserve’s ability to make informed decisions due to a lack of economic information. Operating blindly, the Fed might adopt a more cautious or conservative stance, potentially causing unexpected movements in financial markets.
International Trade Risks
The suspension of activities in the U.S. administration limits its capacity to negotiate, review, or implement trade agreements like the T-MEC. The shortage of personnel and resources in regulatory agencies can slow down bilateral processes, postpone technical meetings, and cool investment decisions.
The U.S. national economy, particularly in food and manufacturing exports, as well as consular and migration procedures, will be affected if the federal budget authorization is further delayed. Agricultural export sector producers will face customs delays due to the lack of U.S. inspectors, potentially causing significant losses from perishable goods not crossing on time.
The manufacturing and automotive industry supply chains will also suffer from delayed border validations, which can halt production lines and impact international contracts. Moreover, migration-related processes at U.S. consulates and embassies in Mexico will slow down due to reduced staff.
Additionally, the ongoing review of our trade agreement with the U.S., scheduled for 2026, may be affected, impacting sensitive topics like origin rules, environment, and labor rights.
Key Questions and Answers
- What is causing the current market volatility? The political stalemate in the U.S., specifically the failure to agree on a federal budget, has resulted in a government shutdown. This situation creates uncertainty about the stability of the world’s largest economy, affecting global markets.
- How is the U.S. government shutdown impacting international trade? The shutdown limits the U.S.’s capacity to negotiate, review, or implement trade agreements. It also slows down bilateral processes and consular migration procedures, affecting sectors like food and manufacturing exports.
- What is the role of gold in this scenario? Gold has emerged as a safe-haven asset amidst the political and economic uncertainty. Its price has surged 48% this year, potentially reaching $4,000 per ounce if tensions persist.
- How does the Federal Reserve’s capacity get affected? The lack of economic information due to the government shutdown restricts the Federal Reserve’s ability to make informed decisions, potentially leading to unexpected market movements.
