Government Shutdown Would Leave Fed Flying Blind

Washington, D.C.
CNN
—

In the event of a U.S. government shutdown, the Bureau of Labor Statistics announced it would stop publishing data, including key numbers on inflation and unemployment. The lack of crucial government data would make it difficult for investors and the Federal Reserve to interpret the U.S. economy.

For now, the economy’s future is unclear: Inflation could slow to the Fed’s 2% target without rising unemployment — known as a “soft landing.” softness” — or the economy could slide into a recession as the effects of the Fed’s 11 rate hikes take hold. a deeper hold.

The state of the economy is understood through data, and each month the BLS releases key indicators such as the Consumer Price Index, which measures inflation; and the Employment Situation Summary, which measures unemployment and job growth. Investors make trading decisions based on these reports.

With the spending deadline set for the end of the month, House Republicans have struggled to reach consensus on a defense spending bill and are now moving forward with a temporary funding plan of the government. Meanwhile, some Republicans are threatening to oust House Speaker Kevin McCarthy if he doesn’t acquiesce to their demands. The political impasse is expected to lead to a disruption in government funding.

“In the event of a federal government shutdown, the Bureau of Labor Statistics will suspend data collection, processing and dissemination,” a spokesperson said in a statement. “Once funding is restored, the BLS will resume normal operations and will notify the public of any changes to the press release schedule on the BLS publication schedule.”

The partial government shutdown in early 2019 had a limited impact on BLS survey operations, but it resulted in the delay of a dozen data reports. Greg Daco, chief economist at EY-Parthenon, said “the 35-day government shutdown led to a data drought with the postponement of more than 10 key data releases, including those on trade, housing and consumer spending.

While private groups release data assessing various parts of the economy, federal data remains critical for policymakers.

“Decisions are made based on the consistency and reliability of government data,” said Agron Nicaj, U.S. economist at MUFG. “This is especially true in the current economic climate where uncertainty is high and the margin of error is very small for the Fed to tighten monetary policy too much or too little.”

The Fed is at a pivotal moment in its historic campaign to defeat high inflation. Price increases have eased from their four-decade peak last June, but soaring oil prices have inflicted more pain on the pump, pushing up overall inflation. The consumer price index rose 3.7% in August from a year earlier, up from the 3.2% annual rise recorded in July, mainly due to higher prices gasoline. Some economists say energy prices could make it harder for the Fed to fight inflation if they stay high long enough, while others say it simply reflects inflation’s bumpy path to the target by 2% from the Fed.

The central bank is also paying close attention to the labor market, which remains strong, due to its role in driving up prices. The monthly BLS Job Openings and Labor Turnover Survey shows that the United States still has millions more job openings than job seekers, meaning that workers can demand higher wages.

Fed officials currently face some uncertainties as they consider the economic outlook, including how much previous Fed rate hikes have already — and will continue to — weigh on economic activity.

The absence of critical government figures could lead to missteps by the Fed, which always emphasizes that its monetary policy decisions are “data dependent.”

“If, for the sake of argument, the Fed overestimates the strength of the real economy and raises rates again in November – due to the delay in downward revisions to the July and August data and the Delayed access to weaker September and October data – investors, businesses and households could result in unnecessary costs and risks,” said Julia Pollak, chief economist at ZipRecruiter.

“By the time the Fed discovers its mistake, the effects of excessive monetary tightening may be difficult to reverse,” she said.

It’s unclear whether the Fed would hold rates steady in the absence of government data or how it would handle a government shutdown during monetary policy deliberations. The effects of a government shutdown also depend on its duration, which is also unclear at this point.