The Fed is attempting to figure out how to boost the labor market without raising inflation.
In the face of high inflation and a weak job market, the Fed is already facing the challenging challenge of setting interest-rate policy. By postponing the release of crucial economic statistics, like as this month’s job report, the government shutdown, which is already in its second day, may make the central bank’s job even more difficult.
Fed officials have handled shutdowns in the past, but this one is particularly difficult given the state of the economy, which includes growing inflation and a weakening labor market.
According to Mark Schweitzer, research associate professor of economics at Case Western Reserve University’s Weatherhead School of Management, “it is a particularly difficult place to watch the data disappear.”
Fed officials are attempting to determine how much the central bank can do to support the labor market with rate reduction without driving up inflation and whether the labor market is becoming so weak that they should be concerned about a recession.
Fed officials maintain that surveys of business contacts and other data sources will enable them to stay abreast of the economy. For instance, the job-listing website Indeed and the payroll processor ADP both monitor the labor market, banks provide credit-card spending statistics, and reports from large stores during earnings season can provide insight into consumers’ financial well-being. Inflation data, however, is more limited.
This is “a critical time for the Fed to not have what I call the gold-star government data,” Tara Sinclair, chair of George Washington University’s economics department, stated.
While statisticians at private businesses typically concentrate on certain topics that are important to them, those in the federal government strive to make their surveys representative.
According to Sinclair, the Fed might not be as worried about losing a month’s worth of government data if the economy was doing well.
However, she emphasized that even a slight increase in the unemployment rate today could provide valuable insight into when the Fed should next cut interest rates.
“It’s one thing for the Fed to hear that business contacts plan to raise prices,” Schweitzer said, “but that doesn’t indicate whether inflation has gone up.” The Fed’s beige book is a compilation of comments from industry sources. The consumer-price index, which is scheduled to be announced on October 15, is the only reliable source of inflation statistics. The shutdown might make it more difficult or take longer to release that report.
“The official statistics are still pretty fundamental to getting things exactly right,” Schweitzer stated.
The Fed’s next interest rate-setting meeting is scheduled for October 28–29.
Fed policymakers disagree about what to do next.
The Fed voted to lower its benchmark rate by a quarter percentage point to a range of 4% to 4.25% last month in an effort to support the labor market. It was the year’s first cut.
The median Fed official penciled in two more quarter-point cuts this year in economic estimates that were made public along with that decision. It was close, though, as many authorities wanted either no cutbacks or very few.
Schweitzer, the former director of research at the Cleveland Fed, stated that he believed Fed officials would be reluctant to make additional changes due to the lack of evidence.
He stated, “If I were them, I would definitely be going on hold,” and added that they have no reliable sources for inflation data.
Ellen Meade, a professor of economics at Duke University and a former Fed employee, concurred.
“It appears that moving from where you are presently could be challenging due to the lack of government data. She suggested that the Fed could wish to remain firm.
Claudia Sahm, the senior economist of New Century Advisors and a former top Fed staffer, stated that she believes the Fed will lower interest rates once again in October.
According to her, the Fed is making cuts because it is concerned about the labor market. It will be difficult to make the case that the job market is safe without the important employment data.
“I think they were pointed in that direction [of a cut] anyways,” she continued. She said that the job market would not benefit from a single quarter-point drop.
The Fed is not acting in a blind manner, according to economists. According to Sahm, it would be more accurate to say that the central bank is operating with a filthy windshield.
“They’ll figure out how to get information in. They have experience navigating shutdowns. She stated, “They will make the most of what they have.”
According to Sahm, the pause in data releases may produce additional market volatility, which could affect the Fed’s strategy.
The market is accustomed to evaluating economic data in anticipation of the Fed’s potential response. Powell and his associates also gain insight from the response of the market.
“Could be a little messier,” Sahm noted of this procedure.
