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Fed’s December Rate Decision Won’t Come Easy, Even if Shutdown Ends Soon

(Bloomberg) -- Federal Reserve officials had to make their latest interest-rate decision without key economic statistics thanks to the US government shutdown. The data they will receive when the government reopens probably won’t make the next decision any easier.

Friday marks the second month without a national employment report since federal agencies publishing economic data went dark. Even if the government were to reopen soon, post-shutdown numbers would be compiled based on surveys conducted retroactively, making them less reliable.

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With each day passing, there’s an increasing chance some October data on jobs and prices may not be released at all, economists say. The uncertainty will prolong a debate among Fed officials about whether the labor market is really weakening fast enough to warrant another rate cut in December amid ongoing inflation risks — a question over which they’re already split.

“It could worsen the divide,” said Michael Reid, a senior US economist at RBC Capital Markets. “You’re going to have the government data quality called into question.”

Fed Chair Jerome Powell managed to forge agreement on the central bank’s rate-setting Federal Open Market Committee over a rate cut in late October — despite the data-drought imposed by the shutdown. But he was quick to caution afterward that doing so again in December would not be so straightforward.

That warning has since been reinforced in public remarks from several policymakers, who took the unusual step of coming out and signaling their preferences for the next decision nearly six weeks in advance.

In October, Fed officials had the latest inflation data in hand, but not the latest report on employment. They will likely face the opposite situation at their Dec. 9-10 meeting, assuming the shutdown ends before then.

That would in theory be helpful for determining the appropriate course of action, given Powell framed the debate about December as largely about the true state of the labor market. It was the driving force behind the rate cuts in September and October after a sharp slowdown in hiring over the summer raised concerns that monetary policy was too restrictive.

Now, the Fed chair said on Oct. 29, “for some part of the committee, it’s time to maybe take a step back and see whether there really are downside risks to the labor market.”

But the October jobs report, which was originally scheduled to be released Friday, will be riddled with caveats — including uncertainty over how much any rise in unemployment is due to federal government workers on temporary furlough. That will make it hard to interpret the numbers. And some economists say the unemployment rate — the key figure for the Fed’s purposes — may not be released at all.

That’s because the report references the week that includes the 12th of each month, and it’s made up of two surveys conducted by the Bureau of Labor Statistics: one of businesses, which produces the main number on nonfarm payrolls, and another of households that’s used to calculate the unemployment rate.

While employers probably retain their payroll data and often report it themselves online, tracking down workers — who are interviewed in-person and over the phone — will likely be more difficult, as they’ll have to recall their employment status for that particular week.

“The longer that slips, the less reliable the responses,” BNP Paribas Senior US Economist Andrew Husby said in a recent note to clients. “At a certain point, we think the BLS may choose to forgo collecting responses for October and focus on the November data, which would mean that no October unemployment rate would ever be published.”

New Battlefront

Even if the report does come with a jobless rate, the exercise of separating the underlying trend from the one-off impact of the shutdown will open up a new battlefront. If all of the roughly 650,000 furloughed federal employees were to be counted as unemployed on temporary layoff, the unemployment rate would climb 0.4 percentage points, according to the Congressional Budget Office.

With the shutdown now in its sixth week, it’s also increasingly likely that the BLS won’t publish an October consumer price index, which largely relies on in-person visits to businesses around the country, economists said. The agency was directed to recall staff to publish the September CPI so the Social Security Administration could make its annual cost-of-living adjustment, but no other reports have come out since the government shut down on Oct. 1.

Questionable employment data and altogether-absent inflation data will leave those more worried about the labor market pushing for more reductions, and those more worried about price pressures advocating a pause, stuck in their respective positions. For now, investors still see the first group winning the day, according to futures contracts showing better-than-even odds of a December rate cut.

What Bloomberg Economics Says...

“With the US government shutdown now in its second month — and with that, jobs reports delayed — Bloomberg Economics has constructed a labor-market index using available labor-related alternative data ... The index shows that the US labor market has continued to cool, though the pace has slowed a touch”

— Stuart Paul, Andrej Sokol and Anna Wong

To read the full note, click here

That side can point to widely followed private-sector hiring data produced by the payroll-processing firm ADP, which showed Wednesday that job growth remained muted through October, and narrowly concentrated in the education and health services sector.

On the other hand, Fed officials have also cited weekly filings for unemployment insurance, which continue to be tabulated by state governments during the shutdown and haven’t seen any meaningful increase.

Government statistics on inflation, meanwhile, are harder to replace given a relative lack of private-sector alternatives.

In the absence of official releases, investors in the $29 trillion Treasuries market found themselves in a similar predicament this week as releases from ADP Research, Challenger, Gray & Christmas Inc. and Revelio Labs moved yields in different directions.

Those conflicting data points underscore the tricky situation for everyone involved, said Ed Al-Hussainy, a portfolio manager at Columbia Threadneedle Investment.

“The gold standard remains unemployment insurance claims and the official unemployment rate,” Al-Hussainy said.

--With assistance from Michael MacKenzie.