The Federal Reserve’s Dilemma: Lack of Economic Data
The Federal Open Market Committee is set to meet next week to determine the future direction of interest rates. Analysts expect the Fed to lower the rate by another quarter-point, following a quarter-point drop in September. However, the Federal Reserve lacks certain key economic data due to the government shutdown, making it challenging to make informed decisions.
The Impact of the Government Shutdown
Most government agencies have stopped collecting economic data during the shutdown, leaving policymakers and businesses without a real-time window into the economy’s performance. The Bureau of Labor Statistics’ monthly jobs report, which provides the unemployment rate and the number of jobs gained or lost, is delayed indefinitely. Weekly unemployment data for first-time jobless claims is also not being released, although states are compiling and publishing this data on a rolling basis.
The Loss of Private Data
The payroll company ADP has cut off the delivery of timely data encompassing 20 percent of all payrolls, which Fed governor Christopher Waller disclosed in an August speech. ADP and the Fed would not comment on the matter, but sources suggest that ADP was unhappy with the disclosure. A letter from Fed chair Jerome Powell asks ADP to resume giving them the data, indicating that the central bank needs the information to set policy.
The Challenges of Making Informed Decisions
The Fed considers information from various sources in setting monetary policy, including anecdotal reports and original data produced by its regional Reserve Banks. However, the loss of public and private data is an acknowledged blow. The Chicago Federal Reserve has introduced a "Labor Market Indicators" report, updated twice a month, that forecasts the unemployment rate. But this relies on Current Population Survey data from the U.S. Census Bureau, which is not being collected during the shutdown.
Private-Sector Attempts to Replicate Jobs Data
Some private companies have attempted to replicate the jobs data, but these reports have limitations. For example, a Carlyle jobs report for September found a relatively small gain of 17,000 jobs, while Revelio reported a gain of 60,000 jobs. ADP’s report showed a loss of 32,000 jobs for the month. However, these reports do not account for public-sector jobs, which are constrained due to the shutdown.
The Consequences of Making Decisions without Data
If the Fed makes a change to the interest rates without a full picture of the economy, the Fed chair will have to answer for that if the decision leads to material changes, particularly in the inflation picture. Typically, interest rate cuts would heat up the economy and could spark greater demand and higher prices. The Fed’s decision will be closely watched, and the lack of data will make it challenging to assess the consequences of their choice.
Conclusion
The Federal Reserve’s lack of economic data due to the government shutdown and the loss of private data from ADP has created a dilemma for policymakers. The Fed must make informed decisions about interest rates without a complete picture of the economy, which could lead to unexpected consequences. As the shutdown continues, the Fed will have to rely on alternative sources of data and use their expertise to make the best possible decisions. The outcome of their meeting next week will be closely watched, and the consequences of their decision will be felt for months to come.
