:max_bytes(150000):strip_icc()/GettyImages-2235766892-a404b902740847648d8ccd62f9998bb9.jpg "Government Shutdown Leaves The Fed Without Data At A Crucial Moment")
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Key Takeaways
- The government shutdown that began Wednesday will delay the release of economic data, including Friday’s key jobs report.
- The lack of data complicates decision-making for Federal Reserve officials, who meet later in the month to decide whether to lower interest rates.
- With official data delayed, financial markets and policymakers will rely on private-sector indicators about the health of the economy.
The federal government shutdown will delay key reports on the job market and inflation, making it harder for officials to decide whether to cut interest rates later this month.
The shutdown affects the government agencies that produce data the Fed relies on to set interest rates. That includes the Bureau of Labor Statistics, which will “completely cease operations” in the event of a shutdown, according to a memo dated Sept. 26 from its parent agency, the Department of Labor. The bureau produces the most comprehensive and widely watched measures of the job market and inflation, including a highly anticipated monthly jobs report due Friday that will now be delayed.
Deliberating Without Data
The lack of job market data could be especially vexing for the Fed, which cut interest rates in September to lower borrowing costs and stabilize a shaky job market. The Fed is scheduled to meet Oct. 28 and 29, and its policy officials are divided about whether to cut rates in the coming months, or keep them higher to tame inflation.
“[A prolonged shutdown] would greatly complicate the Federal Reserve’s deliberations on whether to cut interest rates again at its October … policy meeting,” Nationwide economists Kathy Bostjancic and Oren Klachkin wrote in a commentary.
What This Means For The Economy
A lack of critical data on the labor market and inflation would compromise the ability of the Fed’s policy committee to make a full assessment of the economy when it meets later this month to set interest rates. Last month the Fed cut its key rate—which affects borrowing costs on short-term debt such as credit cards and car loans—and signaled that more cuts are possible, but officials could be reticent to adjust rates again without access to the latest official data.
Fed officials are widely expected to cut the central bank’s interest rate by a quarter-point at the next meeting, but the shutdown puts that outcome in doubt, especially if it drags on.
“A prolonged shutdown would leave the Fed effectively flying blind ahead of its upcoming interest rate-setting meeting, with shuttered statistics agencies denying it access to important labor market and inflation data,” James McCann, senior economist, Edward Jones, wrote in a commentary. “This could lessen the chance that we see an interest rate cut in October, with the central bank preferring to wait until the shutdown passes and key data reports are released.”
The shutdown not only delays reports this month about how the economy fared in September. It could affect reports about October as well, since agencies can’t conduct the surveys that those reports are based on. During the 17-day shutdown in October 2013, which was the last time the BLS closed its doors, reports for September and October were both delayed.
The Fed Has A Compass In The Fog
The Fed will be able to use other privately-produced economic metrics. However economists consider these reports to be less comprehensive and reliable than the “gold standard” statistics produced by the BLS, which are base on massive surveys of businesses and individuals.
One of those metrics is from payroll provider ADP, which on Wednesday said the economy lost 32,000 private-sector jobs in September. That was a worse reading than anticipated by forecasters, who had expected private employers to add 51,000 jobs according to a survey of economists by Dow Jones Newswires and The Wall Street Journal.
The ADP job shortfall is a warning sign about the health of the job market, and could pressure the Fed to lower rates in the absence of any data to the contrary from the BLS.
“The weaker-than-expected ADP report makes the Fed more likely to cut the federal funds target another quarter percent at their October meeting,” Bill Adams, chief economist at Comerica Bank, wrote in a commentary.
At least two more private indicators of the job market are expected Thursday: a report on layoffs from consultancy Challenger, Gray & Christmas; and a labor market report from analytics firm Revelio Labs.
What Happened During The Last Shutdown
The record-breaking 34-day partial shutdown of 2018 and 2019 provides some insight into how the Fed could deal with this one. Although the BLS stayed open during that episode, numerous economic indicators were delayed, including reports on GDP, housing, and others.
The shutdown threw the Fed’s plans into turmoil, according the Federal Open Market Committee transcripts. The lack of information was among several factors that made Fed officials decide to hold interest rates steady at that meeting instead of raising them again, as it had indicated at its previous meeting. The Fed also removed “forward guidance” from its official post-meeting statement.
“If there was ever a good time to take the last remnant of forward guidance out of the statement, this is it,” Thomas Barkin, president of the Federal Reserve Bank of Richmond, said, according to the transcript. “In view of the uncertainties … it seems appropriate to take a wait-and-see attitude.”
