A potential government shutdown in November could hinder the Federal Reserve's ability to raise interest rates, but not for the reasons one might assume, as per Bank of America.

Not only could the shutdown potentially slow down economic growth, making a rate hike an ill-advised move, but an extended impasse would also limit the central bank's access to crucial inflation data, noted the investment bank. This limitation arises because unfunded government agencies such as the Departments of Labor and Commerce would be unable to produce essential data reports on price trends.

"In the event of a month-long or longer shutdown, the Fed would essentially lack critical economic activity and price pressure information leading up to its November meeting," said Aditya Bhave, a U.S. economist at Bank of America.

While Bhave emphasized that a prolonged shutdown is not anticipated, he suggested that if it were to extend beyond a month, it would be prudent for the Fed to maintain the status quo in November. The possibility of a December rate hike, in that case, becomes a close call, but Bhave believes that a pass in November makes it more likely that the current cycle of rate hikes has concluded, unless inflation experiences a clear resurgence.

The Federal Reserve heavily relies on data from the Departments of Labor and Commerce to assess inflation trends. In particular, the Commerce Department's personal consumption expenditures price index serves as a benchmark for longer-term inflation projections, while the Labor Department's consumer price index is a widely-followed indicator by the general public and is also incorporated into the Fed's calculations.

Although these reports are not the sole inflation indicators used by the central bank, their absence in November would complicate the rate decision-making process.

Nonetheless, the financial markets already appear to believe that the Fed's rate hike cycle has concluded. According to CME Group's FedWatch measure, which tracks pricing in the fed funds futures market, there is less than a 30% probability of a final rate hike in November. The tool suggests that the central bank could even commence rate cuts by June 2024.

Bank of America, however, anticipates the Fed will approve one more rate hike, potentially bringing its key borrowing rate into a target range of 5.5% to 5.75%. Bhave mentioned that if the government shutdown lasts only a few weeks, the Fed would still have enough time to gather data and potentially proceed with a rate increase, though the likelihood of such a hike would depend on whether inflation continues to moderate.

The Federal Reserve is set to conclude its two-day meeting on Wednesday, with market expectations strongly leaning towards no change in interest rates.