“We’re in a meeting-by-meeting situation, and we’re going to be looking at the data,” Powell told reporters after the 25-basis-point cut on September 17, adding: “There are no risk-free paths now.”
Those paths have just gotten a whole lot riskier.
The government shutdown that began on Wednesday could delay the release of a large chunk of economic data, meaning the Fed’s ability to accurately assess the labor market and inflation situation – which was already limited – will now be much worse. That, in turn, could make the market rethink its own conviction about the near-term rate outlook.
Key employment and inflation data are set to be delayed, namely weekly jobless claims from the Labor Department, and all-important monthly non-farm payrolls and CPI inflation reports from the Bureau of Labor Statistics.
The September payrolls and CPI inflation reports are due for release this Friday and October 15, respectively. They would probably be the biggest single influences in rate setters’ decisions at the October 28-29 Federal Open Market Committee policy meeting. As Rabobank analysts note, thick with understatement, this is “very inconvenient” for the Fed as these two data points could potentially tilt the balance between the hawks and the doves on the FOMC. The FOMC’s September ‘dot plot’ showed a median estimate of two more rate cuts this year, but it wouldn’t take much to change that. The split of views showed that nine of the FOMC’s 19 members expect only one more cut – or none – by December.
There is a clear polarization of views. Does a shutdown strengthen the doves’ hand?
DATA QUALITY DOUBTS GROW
A quarter-point cut in October is already fully priced into rates futures markets. Another “insurance” cut, as Powell described September’s move, would make sense – better to avoid the risk of falling behind the curve and being forced to ease more aggressively later.
This is particularly true in the event of a prolonged shutdown, which could put a 50-basis-point cut on the table in October or December.
Oxford Economics chief U.S. economist Ryan Sweet estimates that even a partial shutdown reduces GDP growth by 0.1-0.2 percentage points per week. To put that into context, the longest shutdown on record of over 35 days in President Donald Trump‘s first term would reduce fourth-quarter real GDP growth by 0.5-1.0 percentage points.
But there’s also a compelling case for not easing at all, never mind pouring fuel on the fire with cuts made in a haze of uncertainty rather than on data-led evidence, as Powell has insisted upcoming decisions will be based.
The hawks’ base case appears to be strengthening – GDP growth is running close to 4% on an annualized basis, inflation is nearly a percentage point above target and showing few signs of cooling, and Wall Street is at record highs. It’s unclear whether a government shutdown of a few days, or even weeks, would weaken the hawks’ narrative.
One thing that most policymakers and economists do agree on is that the quality and reliability of U.S. economic data are deteriorating, in no small part due to falling response rates to surveys. This leads to skewed or inaccurate results, and more and bigger revisions.
Economists at Goldman Sachs estimate that standard errors are 26% higher on average today than in 2015-2019, and have increased for eight out of 10 government surveys they review. Labor market data appear to have been affected most by falling survey response rates, they note.
“This is an old problem, and old solutions continue to be relevant today: gather more data,” Anna Kovner, director of research at the Richmond Fed, concludes in an article published on Wednesday.
That, of course, will have to wait, probably until long after the shutdown is over. Is patchy data preferable to no data at all? We could be about to find out.
(The opinions expressed here are those of the author, a columnist for Reuters)
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