Washington: The federal government shutdown has deprived the Federal Reserve of critical economic data ahead of its monetary policy meeting next week. Despite the uncertainty caused by the lack of data, it is expected that the Fed will proceed with a 25 basis points cut in interest rates.
According to Anadolu Agency, the government shutdown, which began on October 1 due to a budget dispute in Congress, has entered its 25th day, disrupting the release of significant economic data. The Bureau of Labor Statistics (BLS) has been unable to publish the weekly unemployment claims data or the nonfarm payroll report initially scheduled for October 3. Additionally, the BLS skipped the release of the Producer Price Index (PPI) data last week, although it managed to release consumer inflation data late on Friday.
The latest data indicates that the US Consumer Price Index (CPI) rose by 0.3% month-over-month and by 3% year-over-year in September, falling short of expectations. Core inflation, which excludes volatile energy and food prices, also came in below expectations at 0.2% monthly and 3% annually. White House spokeswoman Karoline Leavitt attributed the lower-than-expected inflation figures to US President Donald Trump’s economic policies. She remarked that the ongoing government shutdown, which the Democrats have chosen to persist, could result in the absence of an October inflation report, creating challenges for businesses, markets, families, and the Federal Reserve.
In the absence of official data, alternative reports such as the ADP Research Institute’s private sector employment report and the Challenger, Gray and Christmas report on layoffs have been used to gauge the health of the labor market. The ADP report indicated a decline of 32,000 jobs in the private sector for September, contrary to expectations for job growth. Additionally, job cuts announced by US employers reached their highest level since 2020, with 946,426 layoffs reported between January and September.
The Federal Reserve’s field reports, including the Beige Book, have shown a slight decline in consumer spending in recent weeks. The latest BLS data revealed that US non-farm payrolls increased by only 22,000 jobs in August, falling short of expectations, while the unemployment rate rose from 4.2% to 4.3%.
Fed Chair Jerome Powell, speaking at an event last week, acknowledged the delay in data releases due to the government shutdown. He noted that the Fed is considering alternative data such as state-level unemployment claims and ADP reports. Powell highlighted the increased downside risks to employment and mentioned a shift in the Fed’s risk assessment. He stressed that managing the tension between employment and inflation targets presents no risk-free policy path.
Opinions among Fed officials vary on the approach to balancing inflation, which remains above target, with a weakening labor market. Some officials argue for caution in rate cuts due to high inflation, while others call for “cautious rate cuts” considering the labor market slowdown. Stephen Miran, a recent Trump appointee to the Fed board, supports faster rate cuts, arguing that current interest rates are excessively high.
Analysts have pointed out that the disruption in key economic indicators complicates the Fed’s ability to assess the economic outlook and policy direction. The limited data flow has left the decision-making process for the Fed’s monetary policy meeting from October 28 to 29 uncertain, with expectations that the Fed will maintain a cautious stance amid the “data darkness.”
Michael Pearce, deputy chief economist for the US at Oxford Economics, told Anadolu that the smaller-than-expected rise in consumer prices in September supports a rate cut next week. However, he cautioned that inflation is likely to remain closer to 3% than 2% for most of next year, making rate cut expectations for 2026 “too aggressive.” Pearce anticipates the Fed will slow the pace of easing with three cuts spread over the next year, while tariffs continue to push goods prices higher.
Steven Kamin, a senior fellow at the American Enterprise Institute (AEI), noted that despite softer-than-expected CPI data, inflation remains above the target level of 2%, a target missed for over four years. He expects the Fed to cut interest rates next week, describing it as a “do no harm” move, assuming the shutdown ends soon and data becomes available for a December re-evaluation.
Olu Sonola, head of US Economic Research at Fitch Ratings, views the inflation data as a relief for the Fed, not derailing a likely second consecutive rate cut. He suggests that next week’s rate cut could serve as “insurance,” with hopes that the shutdown ends by December, allowing the Fed to gain a clearer understanding of job market conditions and place greater emphasis on alternative employment data like ADP reports and state unemployment claims.