The Federal Reserve was already facing one of its most difficult battles, steering a shifting economy through a weakening labor market and stubborn inflation. The government shutdown just made that fight even harder.
To make determinations about its rate policy and other decisions to help the economy, the Fed relies heavily on official economic statistics that are collected and disseminated by the government. The shutdown has effectively cut off access to that data — from the unemployment rate to retail sales — since the beginning of October.
With just one week to go before the Fed’s next decision on interest rates, officials are flying partially blind as they assess whether the labor market requires additional support, after data through August showed the weakest pace of hiring since 2010 and rising unemployment among young Americans and minorities.
It’s the latest wrinkle for policymakers as they tackle a continued attack from the Trump administration on their independence, an ongoing housing affordability crisis that the Fed doesn’t have all the tools to fix, the potential effects of AI, persistent inflation, uncertainty around tariffs and a slowdown in the job market.
The Fed and the shutdown
In the absence of government data, Fed officials have turned to other sources to gauge the labor market and consumer spending — two important drivers of the US economy and the focus of the Fed’s so-called dual mandate to balance economic growth with keeping prices in check.
The problem is that government data is undisputedly the “gold standard” of how the world’s largest economy is measured. Without it, the Fed’s decision making is not fully informed.
“The risk is that the Fed misjudges where the state of its dual mandate sits, whether inflation or the labor market is the bigger concern,” Michael Reynolds, vice president of investment strategy at asset manager Glenmede, told CNN.
The last time Fed officials set monetary policy without key economic data was during the 2018-2019 shutdown. Minutes from the Fed’s January 2019 meeting showed how officials turned to figures on card transactions and vehicles sales in the absence of the Commerce Department’s monthly report on retail sales.
“I wouldn’t call it a data drought,” New York Fed President John Williams told the New York Times in an interview published on October 9.
“We’re still getting a significant amount of data,” he added, pointing to surveys from the Conference Board, the New York Fed and the Institute for Supply Management. Those surveys measure trends in prices, demand, production and overall economic activity.
The Bureau of Labor Statistics on Friday will release the Consumer Price Index for September, having recalled staff to ensure the report can be used as a basis for Social Security’s annual cost-of-living adjustments.
Still, that leaves the Fed in the dark on the labor market’s true health and trajectory. Economists widely agree that private-sector figures cannot fully replace government data, especially considering that the government’s numbers serve as the benchmark for much of the private data.
A housing affordability crisis the Fed can’t fix
The Fed’s main tool — its key interest rate, which influences borrowing costs more broadly — is particularly effective at making borrowing cheaper or more costly, depending on whether the Fed is trying to tamp down inflation or boost employment. So, it’s pretty good at changing how much consumers demand goods and services.
But it does nothing to balance the “supply” side of the supply and demand equation, which is precisely what continues to drive up prices in some parts of the country, such as the Northeast.
Sales of previously owned homes have been sluggish for the third-straight year, and persistently elevated mortgage rates have certainly played a role in keeping buyers on the sidelines. But so has the housing shortage.
“Sales of affordable homes are constrained by the lack of inventory,” National Association of Realtors chief economist Lawrence Yun said in a statement last month.
The Fed has already acknowledged that there’s only so much it can do to alleviate America’s housing woes.
“There is a long-term housing shortage,” Powell said in a news conference after the Fed’s July meeting. “This is not something the Fed can help with.”
The impacts of AI and economic uncertainty
President Donald Trump’s aggressive bid to reshape global trade has forced many businesses to put hiring plans on ice as they wait to see how everything plays out. And at the same time, many companies are actively trying to figure out how to implement AI into their operations.
The result: unusually weak hiring, largely driven by businesses feeling paralyzed. But for some workers, it’s also because of AI.
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“The labor market has been frozen up because people are just having a hard time making decisions,” Laura Ullrich, an economist at Indeed, told CNN. “And AI is certainly having some impact on entry-level tech jobs.”
The Fed’s rate cuts should function like a tide that lifts all boats by making borrowing cheaper, allowing companies to expand head count. But that might not be enough to shore up demand for workers in roles that are increasingly being automated by AI.
Additionally, while the Fed is poised to lower rates further, “so long as economic uncertainty is high, it’s hard to know exactly how many people you should hire,” Ullrich said.
That sentiment is borne out by businesses in the manufacturing and services sectors surveyed by the Institute for Supply Management, who continue to express frustration over Trump’s significant policy changes and their ensuing effects on demand and planning.
“Client demand in professional services remains steady, though decision-making timelines are lengthening due to continued economic uncertainty and interest-rate concerns,” one business said in ISM’s September services survey.
The Fed is set to announce its latest monetary policy decision at the conclusion of its two-day policy meeting ending on October 29, with a post-meeting news conference by Chair Jerome Powell scheduled for 2:30 p.m. ET that day.
