• A looming government shutdown could prevent the Federal Reserve from raising rates in November, Bank of America says.
• Policymakers would have only limited access to inflation data with departments shut that produce key reports.
• If the impasse lasts longer than a month, "we think the prudent course of action would be for the Fed to stay on hold in November," Bank of America said.

A looming government shutdown could prevent the Federal Reserve from raising rates in November, but not for the reason you might think, according to Bank of America.

Not only would the shutdown potentially slow down the economy and make a rate hike the wrong move, but a long impasse would mean central bank policymakers have only limited access to inflation data, the investment bank noted. That's because unfunded agencies such as the departments of Labor and Commerce wouldn't be producing key data reports on price trends.

"If the shutdown lasts for a month or more, the Fed would essentially be flying blind at its November meeting, having learned very little about economic activity and price pressures since the September meeting," Bank of America U.S. economist Aditya Bhave said in a note.

While Bhave said a long shutdown is not expected, if it lasts longer than a month, "we think the prudent course of action would be for the Fed to stay on hold in November. Could the Fed hike in December instead? That is again a close call, but we think a skip in November more likely means the hiking cycle has ended, unless inflation clearly picks up again."

The Fed relies closely on reports from Labor and Commerce to gauge inflation.

In particular, it focuses on Commerce's personal consumption expenditures price index as a yardstick for where inflation is headed for the longer term. Labor's consumer price index is a widely followed measure by the public and also figures into Fed calculations.

While they aren't the only inflation gauges central bank officials use, not having them around in November would complicate the rate decision.

To be sure, markets think the Fed is done already anyway.

Pricing in the fed funds futures market indicates a less than 30% probability of a final hike in November, according to the CME Group's FedWatch measure. The tool indicates the central bank could start cutting by June 2024.

Bank of America, though, expects the Fed to approve one more hike, which would take its key borrowing rate to a target range of 5.5%-5.75%. Bhave said that if the shutdown only lasts a few weeks, the Fed would have enough time to gather data and likely raise rates again, though he said a hike wouldn't be certain if inflation continues to moderate.

The Fed concludes its two-day meeting on Wednesday, with markets overwhelmingly expecting rates to stay put.

— CNBC's Michael Bloom contributed reporting.

Correction: Another hike by the Fed would take its key borrowing rate to a target range of 5.5%-5.75%. An earlier version misstated the range.