The Federal Reserve was already facing a difficult decision on the rate of interest reduction after resuming the cuts last month. But this challenge tends to get worse if the US government shutdown deprives the central bank of the essential data used to evaluate the economy.
The Department of Labor Statistics said it will not disclose the long-awaited employment report. Other important indicators, such as the next consumer price rate, are also at risk if Congress and President Donald Trump do not soon reach an agreement.
This would leave the Fed with a more hazy view of the economy as its leaders already differ on the strategy for interest cuts before the next meeting at the end of the month.
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“It is painful not to receive official statistics just when we are trying to understand if the economy is in transition,” said Austan Goolsbee, president of the Chicago Fed and voting member of the monetary policy committee.
Politics formulators want to know to what extent they are restricting the economy with the current level of interest. This assessment is more difficult if only alternative data sources remain.
If interest rates are containing little growth, the Fed will have a limited space to reduce financing costs before reaching the so -called “neutral” level – when monetary policy does not accelerate or brake economic activity. Going too fast, or passing this point, can aggravate inflationary pressures associated with Trump’s tariffs. But if interest rates are strongly restricting the activity, the Central Bank may have to act faster to avoid damage to the job market.
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“There is a huge disagreement about where this neutral level is,” said Stephen Stanley, a US chief economist at Santander. “It is possible to understand why some are in a hurry and others have no hurry.”
Stanley stated that a prolonged shutdown would add one more reason for concern to the monetary authorities. Economists estimate that each week of federal operations stoppage can reduce by about one tenth of the quarter’s GDP.
But the closure of the government is not the only risk in the Fed radar. The slowdown in monthly employment growth has already increased concern about the labor market, although there are disagreements about its vulnerability, as the unemployment rate remains stable by 4.3%.
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At the same time, inflation moved away from the target of 2% of the Fed, with high item prices more exposed to tariffs. Many leaders believe that these pressures tend to dissipate over time. But each new round of tariffs – including the recently announced those on furniture, kitchen cabinets and wood – can extend the process.
Prior to Shutdown, Fed President Jerome Powell signaled gradual interest reduction, today between 4% and 4.25% after September cut. He classified the initial movement as part of a “risk management” strategy to avoid greater fragility in the labor market. Powell emphasized after that this was a possible insurance to offer, given his expectation that inflation linked to tariffs would be temporary only.
Like Powell, many leaders still describe interest rates as “moderately restrictive.” But not everyone agrees.
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Stephen Miran, a new member of the current -licensed Fed Board of Fed’s governors, considers the rates “very restrictive”. He has recently warned that not quickly reducing them by 2 percentage points may result in “unnecessary layoffs and higher unemployment.”
Miran’s view starts from the premise that the neutral rate is much lower than estimated by the Fed. Most leaders see this level around 3%, or 1% adjusted by inflation. But, according to Miran, Trump’s rates, immigration restrictions, and deregulation efforts make the real rate close to zero.
For Vincent Reinhart, former Fed Economist and today at BNY Investments, this argument loses strength because, despite the slower growth, the economy does not look like a collapse. Companies are not fired in mass, and consumption remains firm.
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“Based on the level of consumption, the neutral rate cannot be so low,” he said.
If Miran is right, added Steven Blitz, a US chief economist at GlobalData TS Lombard, would indicate that management is damaging the economy rather than strengthening it.
“His message is that the government has adopted a set of policies that will slow growth unless the Fed cut interest rates,” he said.
So far, none of Miran’s new colleagues seems convinced. Instead, a group of Fed leaders has reinforced the need for caution in the cuts.
Clear signs of weakening the labor market would help to consolidate the argument for further interest rates. But accumulating this evidence will be more difficult the longer the shutdown lasts.
“This is not where you want to be when you are just restarting a loosening campaign,” said James Knightley, an international chief economist in Ing. “You want to have the justifications to support your decision.”
