Federal Reserve Chair Jerome Powell repeatedly has insisted that the U.S. central bank will be data dependent in formulating future monetary policy. But what would happen if there was a dearth of critical data on which the Fed depends? We may find out in October, in the event of a U.S. government shutdown.
Disagreements in Congress over federal spending and immigration policies appear increasingly likely to derail any attempts to pass crucial appropriations legislation before the Sept. 30 end of the government’s fiscal year. Without any action on federal funding by the Sept. 30 deadline, all nonessential activity by federal agencies would cease until Democrats and Republicans in the Senate and House of Representatives are able to agree on a path forward.
Included among so-called nonessential government activity is the collection, processing, and dissemination of government data, including employment and inflation figures. Cody Parkinson, a spokesperson with the Bureau of Labor Statistics, told 叠补谤谤辞苍’蝉 that such activities will stop in the event of a shutdown and resume only after funding is restored.
Thus, a prolonged shutdown, which seems likely to begin Oct. 1, could temporarily halt the release of the September jobs report, due out Oct. 6, and the September consumer price index numbers, set to be released Oct. 12. Third-quarter estimates of gross domestic product, collected by the Bureau of Economic Analysis, a branch of the Commerce Department, are currently slated for release on Oct. 26 and could be similarly affected.
Any such delays would mean that Fed officials might be faced with making an interest-rate call at their Oct. 31-Nov. 1 meeting without seeing see the latest data on employment, inflation, and economic growth, all of which would otherwise factor heavily in their decision about whether to raise interest rates by another quarter of a percentage point, or leave them unchanged.
In that situation, Fed officials would “almost certainly” refrain from hiking rates in November, says Joe Brusuelas, chief economist with RSM US.?
“You don’t know what happened on inflation, you don’t know what happened with employment, you don’t know what happened with wages, and therefore you err on the side of caution,” Brusuelas says. “You just wait.”
The Fed could later decide to raise rates again in December, however, or early in 2024, if the relevant data, once released, suggest to officials that further tightening is still needed.
Delays in the data due to Congressional gridlock aren’t without precedent: The federal government shutdown in 2013, which lasted for 16 days, forced delays in a slew of BLS data reports. The release of the September jobs report, for example, was postponed by 18 days that year, while the subsequent October report was released a week later than scheduled.
At that time, the Fed reached out to the BLS and suggested that the central bank could fund the agency to produce the employment report even during the shutdown, says Erica Groshen, a senior economics advisor at Cornell University who was BLS commissioner at the time.?
Ultimately, however, agency attorneys determined that couldn’t be done because it would be, in a sense, “subverting the will of Congress,” Groshen told 叠补谤谤辞苍’蝉. “So the Fed didn’t have that information when it would have liked that information,” she said.
A government shutdown likely would have to run at least three or four weeks in length for the collection and dissemination of data to be impacted to a degree that would leave the Fed flying blind ahead of the November meeting. The 2013 calendar of delays shows that while the jobs and inflation reports both came out significantly behind schedule, they were released before the end of the month. If that were to happen this year, the central bank would see them in time.
But several analysts believe the disagreements fueling the current funding fight could lead to a more prolonged shutdown this year than in past episodes. Nor is there anything on the calendar that would serve as a catalyst to force lawmakers to act quickly. In 2013, in contrast, negotiations ultimately accelerated because inaction would have led to the U.S. breaching its debt ceiling—an event that would have had far more catastrophic consequences for the economy than the shutdown itself.
The 2018-19 government shutdown, which at 35 days was the longest in history, was only a partial shutdown, given that lawmakers had passed several funding bills before it began. The 2013 shutdown brought a complete halt to all nonessential federal activity, as no funding measures had been passed.
In the absence of federal data, the Fed would be able to lean on private-sector figures such as the ADP employment report to get a sense of how the economy was doing ahead of the November meeting. Fed officials could also monitor unemployment insurance claims data, which would continue to be released, given that jobless aid is considered an essential service.
But the overall uncertainty the shutdown would cause, and the modest but real impact it could have on growth, likely would still tip the scales in favor of a rate-hike pause for the month, analysts say. Goldman Sachs economists estimate that a governmentwide shutdown would reduce economic growth by about 0.2 percentage points for each week that it lasts, although growth would increase by the same cumulative amount in the quarter following reopening.
Alec Phillips, Goldman’s chief U.S. political economist, wrote that a prolonged shutdown “might add incrementally” to the expectation that the Fed holds rates steady in November.
Investors shouldn’t take that to mean the central bank might be done hiking, however. There’s always the December meeting—and Fed officials should have plenty of data by then to inform their decision.
Write to Megan Cassella at [email protected]