Washington – The U.S. Federal Reserve is now facing one of its most challenging tasks: how to steer the economy through a slowing labor market and persistent inflation without taking on unnecessary risks. The government shutdown has added a new wrinkle to this struggle.
To make decisions about monetary policy and other steps that could support the economy, the Fed relies on official economic data gathered and disseminated by the government – from the unemployment rate to retail sales. The shutdown has effectively cut off access to these data since early October.
A week ahead of the next rate decision, officials are working “partially blind,” assessing whether additional support for the labor market is warranted after August data pointed to the weakest pace of hiring since 2010 and rising unemployment among young people and minority groups.
This is yet another element in the ongoing debate over the Fed’s independence, alongside long-standing criticism from the Trump administration of their autonomy, housing affordability issues that the Fed cannot fully address with its tools, and the impacts of artificial intelligence, persistent inflation, and uncertainty regarding tariffs and the state of the labor market.
In the absence of government data, the Fed turns to other sources to gauge the state of the labor market and consumer spending – two key components of the so-called Fed’s dual mandate: supporting employment and controlling prices.
The Impact of the Government Shutdown on Fed Data and Decisions
The real problem is that government data are considered the “gold standard” for measuring the size of the economy. The absence of these figures undermines the justification for the Fed’s decisions. There is also a risk of losing access to private employment data if private-sector deals remain unavailable after the breakdown in cooperation with ADP in August.
“The risk is that the Fed misreads the state of its dual mandate, whether inflation or the labor market poses a bigger threat.”
– Michael Reynolds, vice president of investment strategy at Glenmede
The last time the Fed made decisions without a full data set was during data releases in 2018–2019. The minutes from the January 2019 meeting indicated that officials turned to card-transactions data and auto sales because monthly retail reports were unavailable.
“I wouldn’t call it a data gap.”
– John Williams, President of the Federal Reserve Bank of New York
The Fed notes that private-sector data still carry useful signals, but official government figures remain the baseline for most private estimates. Conference Board surveys, the Federal Reserve Bank of New York, and the Institute for Supply Management also provide important readings on prices, demand, production, and overall economic activity.
On Friday they expect the release of the Consumer Price Index for September, as staff return to their desks to ensure the report is used as the basis for future cost-of-living adjustments.
The Fed’s main tool – the federal funds rate – remains the most effective way to influence borrowing costs, and thus consumer demand. However, it does not address the “supply” side in the market: the housing sector and other goods face tight supply, high mortgage rates, and slow sales growth.
“Sales of affordable housing are constrained by a lack of supply,” said Lawrence Yun, Chief Economist of the National Association of Realtors. The Fed has already acknowledged a long-term housing crisis and stressed that this is not something monetary policy can fix.
AI and Economic Uncertainty
In the context of heightened U.S. trade policy activity, many companies are pausing hiring while also more actively exploring how the deployment of artificial intelligence could reshape their business processes.
“The labor market is frozen, as people simply aren’t making decisions.”
– Klara Ulich, economist at Indeed, CNN
“And artificial intelligence, certainly, is influencing entry-level positions in the tech sector,” she adds. A Fed rate cut could ease borrowing and help companies develop their workforce, but that may not be enough to sustain demand for new jobs that are increasingly automated.
Economists also note that even with potential rate cuts, it isn’t always easy to determine how many people to hire due to prolonged economic uncertainty. The ISM survey for September adds signals that demand remained modest, but the pace of decision-making grew longer due to turbulence in expectations about interest rates.
The next Fed monetary decision is expected after two days of meetings, which will conclude on October 29; Fed Chair Jerome Powell’s press conference is scheduled for 2:30 p.m. Eastern Time that day.