By Howard Schneider
WASHINGTON (Reuters) -The Federal Reserve will go into a policy meeting next week with its view of the economy obscured by a U.S. government shutdown that has suspended the release of key data, a less-than-ideal situation for policymakers divided over which risks deserve the most attention.
Official employment data hasn’t been released since the shutdown of the federal government began on October 1, but what information that remains available points to still-weak job growth. The Fed’s own economic field reporting, still underway at the self-funded central bank, showed possible cracks in consumer spending, and recent business confidence surveys pointed to a dip.
Yet businesses are also warning of coming price increases at a time when inflation is lodged above the Fed’s 2% target, estimates of overall economic growth are getting upgraded as the scope of business investment becomes clear, and economists have begun pointing to a possible economic jolt next year as new tax laws, including exclusions for tips and overtime income, boost households’ refunds.
FED OFFICIALS FOCUSED ON JOB MARKET
Financial markets expect the U.S. central bank to lower its benchmark interest rate by a quarter of a percentage point to the 3.75%-4.00% range at its October 28-29 policy meeting.
But officials and economists “are just flying blind,” said David Seif, chief economist for developed markets at Nomura. “The big question mark right now is what is going on in the labor market, and we cannot know that until we see the report” on monthly employment from the Bureau of Labor Statistics. That report has been delayed by the shutdown, which means Fed officials haven’t had a full readout on the job market since early September.
Leading U.S. central bank officials, including Fed Chair Jerome Powell, have focused their recent remarks on the labor market, where growth slid to an average monthly pace of 29,000 jobs from June through August, well below the average of the pre-COVID-19 era.
New risks have emerged as well, including loan loss disclosures by two banks that rattled stock markets, and renewed U.S.-China trade tensions that could upend what Fed officials had hoped was emerging clarity about new global trading rules.
The U.S. Labor Department’s statistical agency will release the Consumer Price Index for September on October 24 after the Trump administration ordered some staff back to work so that the inflation data for last month is available to determine the annual Social Security cost-of-living increase. Economists polled by Reuters estimate the index rose 3.1% on a year-over-year basis in September, an acceleration from the month before and a number likely to keep alive some policymakers’ concerns about the wisdom of cutting rates any further.
The Personal Consumption Expenditures Price Index, which the Fed uses for its inflation target, has risen from a recent low of 2.3% in April to 2.7% in August, the most recent report. Fed officials expect it to end the year at 3.0% before declining in 2026, a fact some policymakers feel risks a worse inflation problem as households and businesses become accustomed to prices rising faster than the 2% target, as has been the case for the last four and a half years.
Kansas City Fed President Jeffrey Schmid, a voting member of the Fed’s policy-setting committee this year, said he felt the current policy rate was “the right place to be,” still high enough to keep downward pressure on inflation.
Just how much pressure is a matter of debate, one where the stifled flow of government data will become more important over time.
TRACKING INFLATION DURING SHUTDOWN HAS BECOME CHALLENGING
Fed officials hold wide-ranging views about the economy – from Schmid’s concerns about inflation to new Fed Governor Stephen Miran’s view that interest rates are far too high and inflation is about to drop – but all rely on fresh government data to either validate their outlook or prompt a change.
While Fed officials have ways to monitor the job market outside of the Labor Department’s data, through state-level unemployment claims, for example, or various private payroll reports, there are fewer alternatives for tracking inflation.
Private reports on output and corporate and household attitudes also are still being produced, but monthly government data on consumption and spending and comprehensive quarterly reports on gross domestic product that would usually be updated later this month won’t be available if the shutdown continues.
Even alternatives, like massive databases of credit card transactions reported by banks, are more like complements to government data than good substitutes, Richmond Fed President Thomas Barkin said last week.
They “are good and useful. They are not as comprehensive nor are they as calibrated,” he told the Richmond Association for Business Economics. “Is there anybody that doesn’t have a credit card? Yeah, the 25% of people who have the least money.”
It is those details in government reports that shape policymakers’ views.
Slow job growth, for example, implies one thing if it is due to a weak economy, another if it is due to a lack of workers because of tighter immigration policy. The Labor Department’s monthly jobs report includes estimates of the numbers of foreign- and native-born workers, data that is not available from private labor market reports.
The various inflation reports, which will cease after the next CPI release as long as the shutdown continues, also contain immense amounts of data that are important to the Fed.
It is a particularly tricky moment, Fed Governor Christopher Waller said last week, with private data pointing to still-weak hiring, but economic growth potentially accelerating.
Business investment overall is expanding, but is tepid outside the rush of capital to the artificial intelligence area and, while stock markets have been rising and corporate financing is comparatively cheap, mortgage rates remain high. Wealthier households are spending, while others bargain-shop to cope with higher prices.
“There’s this bifurcation in so many ways that makes reading the economy tough right now,” Waller, a candidate to replace Powell as Fed chief next year, told Bloomberg Television, advocating “cautious” continued rate cuts, including a quarter-percentage-point reduction in borrowing costs later this month, but noting that further cuts are dependent on how inflation behaves and whether job growth weakens further.
For now “we can make our way through,” Minneapolis Fed President Neel Kashkari said last week. “But the longer (the shutdown) goes on, the less confidence I have that we are reading the economy appropriately.”
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
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