"‘New Federal Reserve News Agency’: Government shutdown leads to data disruption, Fed divisions may be harder to resolve."

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On Thursday, Nick Timiraos, a well-known financial journalist known as the "New Fedwire," wrote that the ongoing U.S. federal government shutdown may force the Federal Reserve to make its next interest rate decision without access to key economic data, making it difficult to reconcile disagreements among officials over the "magnitude and pace of rate cuts."

Timiraos said that, ironically, the position of Trump and his allies calling for a "sharp rate cut" actually depends on clear signals of a rapidly deteriorating labor market—signals that are hidden in those economic reports now temporarily unavailable due to the government shutdown.

He stated that, with no new government economic data available, the Fed is likely to opt for another “25 basis point rate cut” at its next meeting in two weeks, echoing last month's move. At that time, concerns within the Fed about a potentially swift weakening of the labor market outweighed vigilance over "persistently high inflation." This week, Fed Chair Powell said that the recent lack of data has not changed this "trade-off."

The Fed can only rely on “secondary information”

The federal government shutdown that began October 1 has led to the suspension of the September jobs report and delayed this week’s scheduled inflation data.

The Department of Labor has recalled some furloughed staff to prepare the CPI release. The CPI, initially set for release in mid-October, is now delayed to October 24, just a few days before the Fed meeting. CPI is one of the key statistics used by the central bank in making rate decisions.

On Tuesday, Powell said at a meeting,

“From our point of view, this data is becoming increasingly indispensable,”

“If the shutdown continues, the data will not only stop being published but will also stop being collected, which will make our job more challenging.”

Although inflation data can provide some guidance to the Fed, it’s only partial information. For other key indicators of consumer spending and the labor market, the Fed currently can only rely on certain “secondary” private data sources, as well as “anecdotal information” provided by businesses.

This data gap has come at an especially awkward time. Timiraos said the Fed is now trying to sort out the structural changes to the economy brought about by a series of Trump administration policy “experiments.” For example, tariff policies have raised operational costs for manufacturing and small businesses, causing consumer prices to rise; uncertainty around trade has led companies to scale back hiring to preserve profit margins; meanwhile, tighter immigration policies have limited labor force growth, possibly slowing employment gains.

Fed divisions already existed before the government shutdown

Even before losing authoritative government data, the Fed was already divided internally over the outlook for jobs and inflation. Some officials worry about a sudden contraction in labor demand but are more optimistic about inflation; others believe that the slowdown in employment growth mainly reflects demographic changes and argue what is truly worrisome is that if jobs stabilize, inflation could become more stubborn.

Timiraos believes that without supporting “jobs” or “inflation” data, these disputes are hard to resolve, making it even harder to win more committee support for the sharp rate cuts pushed by the Trump camp.

Deutsche Bank’s Chief US Economist Matthew Luzzetti said,

“Without data, it will be difficult for the committee to form a majority supporting more aggressive moves,”

“So the most viable path now is to cut rates again in October, by 25 basis points.”

On the other hand, if the decision is to keep rates unchanged, it would require seeing strong September jobs data at the very least, potentially also accompanied by upward revisions to the data from previous months.

Increasing reliance on private data in recent years

Over the past 30 years, the US government has shut down three times and delayed the release of important economic data. In early 1996, a 21-day shutdown delayed the December 1995 jobs report by two weeks, with the CPI data almost three weeks late. At that time, the Fed received the CPI data the day after its January 1996 meeting, during which it announced a rate cut.

In October 2013, a 16-day government shutdown also delayed jobs and inflation data by about two weeks. Then-San Francisco Fed President, now New York Fed President John Williams, said on the first day of the meeting:

“Although some economic data are delayed, we are not flying blind.”

Williams also mentioned at the time that the Fed could use other sources to substitute for the late government inflation data. The partial government shutdown at the end of 2018 also delayed some Commerce Department data, but the Labor Department was unaffected, as its funding had already been approved by Congress and the White House, so CPI and jobs reports continued as normal.

In recent years, both the Fed and Wall Street analysts have increasingly relied on private institution data. For example, Fed staff economists use ADP data to estimate private employment figures.

In addition, job sites like Indeed publish their own vacancy indicators, while credit card companies and other financial institutions release weekly consumer spending tracker data.

However, private data is typically used in conjunction with official data, especially in employment. Official data has a long history and rigorous standards, and is considered the “gold standard” for measuring US economic activity.

“Although private data isn't as broad or representative, with enough information collected, it can still roughly capture the real situation,” Fed Governor Chris Waller said last week. He believes the current data overall continues to show a weak labor market.

Timiraos believes that if the shutdown continues past the Fed’s next meeting, the subsequent resumption of data releases may help the Fed reach internal consensus or set the stage for a more thorough rate-cut debate at the December meeting.

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