The Fed faces a major challenge as economic data is disrupted by the government shutdown.
Data “disappears”
The US Federal Reserve faces a difficult dilemma: how to support a weakening labor market without fueling inflation. The situation is further complicated by the fact that the government shutdown could delay the release of key economic data, such as this month’s jobs report.
Fed officials have dealt with government shutdowns before. But rising inflation and a weakening labor market make this one particularly difficult.
The Fed is trying to determine whether the labor market is weak enough to make it fear a recession. And how far it can loosen monetary policy without pushing inflation higher.
Some officials say they can still rely on alternative data such as reports from ADP, the jobs site Indeed, credit card spending data from banks, or retail sales results. However, inflation data is much scarcer.
“This is a very important period where the Fed lacks good data from the government,” said Tara Sinclair, chair of the economics department at George Washington University.
If the economy is growing strongly, a month of missing data might not be a concern, Sinclair said. But in the current environment, even a small sign of rising unemployment could be crucial in deciding whether the Fed should continue to cut interest rates.
Mark Schweitzer, professor of economics at the Weatherhead School of Management at Case Western Reserve University, notes that the business survey data in the Fed’s Beige Book report may show how much businesses intend to raise prices, but it does not directly reflect how much inflation has increased. Therefore, official data like the Consumer Price Index (CPI), due for release on October 15, is no substitute. The government shutdown could delay that report.
“Official statistics remain the basis for making accurate decisions,” Schweitzer added.
The Fed is scheduled to hold its next policy meeting on October 28-29.
Fed officials disagree on next steps
Last month, the Fed cut its benchmark interest rate by 0.25 percentage point, to a range of 4% – 4.25%, to support the labor market. This was the first rate cut in 2025.
According to economic forecasts released alongside the decision, the Fed officials’ neutral scenario calls for two more cuts this year. However, the votes were close, with many officials favoring smaller cuts or even no further cuts.
Professor Schweitzer, a former director of research at the Cleveland Fed, said the lack of data could make officials more cautious. “If it were me, I would pause. There is no source that gives a complete picture of inflation right now,” he said.
Former Fed staffer Ellen Meade, now an economics professor at Duke University, agrees. “Certainly the lack of government data will make it difficult for the Fed to make big changes. They may want to hold their ground,” she said.
However, former senior Fed official Claudia Sahm, now chief economist at New Century Advisors, said the Fed will still cut interest rates in October.
“The Fed is worried about the labor market. Without significant jobs data, it is difficult to argue that the risks have passed. A quarter-point rate cut is not enough to support the labor market,” she said.
The Fed is not completely “blind,” Sahm said, but rather “driving with a dirty windshield.” The Fed will seek to gather more information from multiple sources and maximize the data it has, but this process could make markets more volatile.
“The capital markets are used to reacting to data to predict the Fed’s moves, and Powell and his colleagues are also watching the market reaction. This time, that process may be a little more messy,” Ms. Sahm concluded.
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