Explainer-How a US government shutdown could affect financial markets

WASHINGTON (Reuters) -The risk of a partial U.S. government shutdown beginning next week is rising as congressional Democrats and Republicans hit an impasse over how to continue to fund the federal government. 

A shutdown could affect financial markets by limiting the operations of financial regulators and delaying the publication of key economic data. 

How might markets react?

Historically, markets have tended to shrug off shutdowns. However, this time could be different. 

A prolonged shutdown risks delaying or canceling key economic data releases investors use to assess macroeconomic trends, such as the monthly employment and inflation reports, analysts at Nomura said in a note this week.

That would mean the Federal Reserve is “flying blind”, making it more likely to stick with its own economic projections of two 25-basis-point rate cuts for the rest of 2025, the analysts said.

With investors unable to assess the extent of a U.S. economic slowdown, the Treasury yield curve could steepen further as rate cuts get priced in with more conviction, leading to a wider gap between short- and long-dated Treasury yields, TD Securities said in a note.

A lengthy government shutdown could also affect some market participants' ability to conduct complex trades for which they may require regulatory guidance. 

What happens to financial regulators?

While U.S. President Donald Trump's administration had not widely shared its contingency plans as of Tuesday, a shutdown would likely reduce the U.S. Securities and Exchange Commission (SEC) to a skeletal staff, according to its October 2024 plan for a lapse in government funding.

This would severely limit the agency’s ability to review corporate filings, investigate misconduct, and oversee markets.

Likewise, the Commodity Futures Trading Commission would furlough almost all of its employees and cease most market oversight activity, according to its 2023 contingency plan.

Previous government shutdowns have caused delays in the CFTC publishing reports on traders' positions in futures and options markets.

The banking regulators and consumer watchdog, which are not funded by congressional appropriations, will remain functional.

In 2019, a protracted government shutdown slowed down some of Trump's de-regulatory efforts in part because of staff furloughs at the Office of the Federal Register, which must formally publish all steps in the rule-writing process, Reuters reported at the time. 

Will IPOs be affected?

Yes. A shutdown would likely freeze the IPO pipeline. Companies planning to go public would be unable to proceed without the SEC's approval, potentially dampening momentum in the equity capital markets, which have enjoyed an IPO boom in recent months. 

(Compiled by Michelle PriceEditing by Marguerita Choy)