The Federal Reserve is approaching a pivotal moment for monetary policy just as the government shutdown has cut off access to its most important economic data, raising questions about how the central bank is gathering information.
This week, the government shut down for the first time since 2019. Agencies across the board have been forced to send employees home and only conduct essential work. One casualty of the shutdown with outside implications is the publication of key economic reports, such as the monthly employment and inflation reports.
The blackout on economic indicators comes as the Fed is attempting to steer the U.S. economy away from inflation while guiding it through a slowing labor market.
Without those key reports, the Fed is flying a bit blind. Experts say that the Fed has tools and expertise to navigate for a while without the reports, but that will become more and more challenging as the shutdown drags on.
“The Fed isn’t operating in total darkness, but it definitely is operating in a fog,” Mark Hamrick, senior economic analyst at Bankrate, told the Washington Examiner. “And you know the situation is foggy enough to begin with, but this makes it only worse.”
WHITE HOUSE PRESSURES DEMOCRATS OVER SHUTDOWN DELAYS TO KEY ECONOMIC DATA
On Friday, the Fed was supposed to release the jobs report for September, but that was delayed. The labor market has been notably softening in recent months.
In fact, the main reason the Fed decided to pivot to cutting interest rates last month was due to the slowdown in job creation.
Yet, the picture is complicated by the fact that inflation is still relatively high. Inflation, gauged by the consumer price index and personal consumption expenditures price index, was running at 2.9% and 2.7% last month, respectively. That is above the Fed’s 2% goal.
Currently, investors are betting that the Fed will cut rates by a relatively gentle quarter of a percentage point at its next meeting later this month. And Desmond Lachman, a senior fellow at the American Enterprise Institute, said the Fed will likely be fine doing so at the next meeting, given that monetary policy is already restrictive, meaning it is restraining overall spending and thus putting downward pressure on inflation. By pursuing smaller rate cuts, he said, the Fed has a larger margin for error.
“The fact that [the Fed]’s doing these interest rates increases decreases gradually means that they can afford a period of uncertainty of the data,” Lachman told the Washington Examiner.
However, things will get much more challenging the longer the government stays shut down.
David Wilcox, a senior fellow at the Peterson Institute for International Economics and director of U.S. economic research at Bloomberg Economics, previously worked for years at the Fed, including as director of the central bank’s Division of Research and Statistics.
He said the lost data is a valuable resource that informs the Fed’s decisions.
“Certainly, the federal data are the gold standard of what’s available to the Fed,” Wilcox told the Washington Examiner. “There’s no replacing the employment report we didn’t get this morning, the CPI release that’s scheduled for week after next.”
Wilcox cited two complicating factors as time goes on. First, more and more reports will not be released, and second, this not only affects the release of economic reports, but it also affects data collection — something that could end up negatively impacting the Fed’s decision-making even after the shutdown ends.
The late reports themselves will eventually be released if the government reopens in the coming weeks, but Wilcox said the loss of data collection is a more “fundamental” problem. For instance, it would create major headaches if the shutdown cuts into the period where the government starts interviewing tens of thousands of households for the October employment report later this month.
“Heaven forbid, if the shutdown runs through that interview period,” he said. “That is a form of damage that is extremely difficult to basically impossible to reverse when the government reopens.”
In the meantime, the Fed has some metrics and reports outside of the data it can use to shape its decisions.
For example, payroll company ADP releases its own jobs report every month. That report, released this week, showed that private employers cut some 32,000 jobs in September, a concerning sign for the labor market and the economy.
Citing his time at the Fed, Wilcox said the two areas in which the Fed was most adept at complementing data were the employment data and credit card transactions. However, the missing inflation data will be more challenging for the central bank.
SHUTDOWN WOULD HAVE FALLOUT FOR GOVERNMENT WORKERS, THE FED, AND MARKETS
“On prices, they’re even more at sea,” said Josh Bivens, chief economist at the Economic Policy Institute. “The best nonfederal stats on prices are probably on rents from places like Zillow, but rents are not the driver of inflation in recent years — it’s other parts of the economy where there really are no substitute.”
However, all of this will come down to Congress and whether it can make a deal quickly. The longest shutdown, which ended in 2019, lasted 35 days. The Fed and investors are hoping that this one will be much shorter.
