The Federal Reserve is caught in a "data black hole": Government shutdown leads to critical economic data missing, December rate cut path divergence may worsen.

Affected by the US government shutdown, Federal Reserve officials made the latest interest rate decision without key economic data. The data obtained after the government resumes operation may not make the next decision any easier. Due to the shutdown of federal agencies responsible for releasing economic data, the national employment report in the US has been suspended for two months, with this Friday marking the second month without the report. Even if the government quickly reopens, the data issued after resuming work will be compiled based on retrospective surveys and may not be very reliable. Economists are saying that with the passage of time, some October employment and price data may never be published. This uncertainty will prolong debates among Federal Reserve officials - in the background of persistent inflation risks, is the labor market really weak enough to support another interest rate cut in December? Officials already have differing opinions on this issue. "This could worsen disagreements," said Michael Reade, senior US economist at RBC Capital Markets. "The quality of government data will be called into question." Despite the lack of data due to the shutdown, Federal Reserve Chairman Jerome Powell successfully pushed the FOMC to reach a consensus on a rate cut at the end of October. However, he quickly warned that doing the same in December would not be as straightforward. Since then, several policymakers have reinforced this warning in public statements - they have remarkably indicated their inclination towards the next decision nearly six weeks in advance. In October, Federal Reserve officials had access to the latest inflation data, but not the latest employment report. Assuming the shutdown ends before this, they may face the opposite situation at their meeting on December 9th and 10th. In theory, this could help in determining the appropriate course of action, as Powell is likely to focus the December debate primarily on the actual state of the labor market. The significant slowdown in hiring over the summer sparked concerns about monetary policy being too tight, which was a driving factor behind the rate cuts in September and October. Powell stated on October 29th, "For some members of the committee, it may now be time to pause and assess whether the labor market truly is experiencing downside risks." However, the October employment report that was supposed to be released this Friday will be fraught with uncertainty - including how much of the rise in the unemployment rate is due to federal employees being furloughed. This will complicate data interpretation. Some economists suggest that key unemployment rate data, vital for the Federal Reserve, may not even be released. This is because the report relies on data from the week that includes the 12th of each month, consisting of two surveys conducted by the Bureau of Labor Statistics (BLS): one survey for businesses to determine nonfarm payroll employment figures and one for households to calculate the unemployment rate. Although employers may retain salary data and usually report online, tracking respondents (through face-to-face and telephone interviews) may become more challenging as they need to recall their employment status during that week. "The longer it drags on, the less reliable the respondents answers become," said Andrew Husby, senior US economist at BNP Paribas in a recent report to clients. "We believe that at some point, the BLS may choose to forgo collecting Octobers data and instead focus on Novembers data, meaning the October unemployment rate may never be released." New Controversy Even if the report is eventually released and includes unemployment rate data, distinguishing underlying trends from the one-off impacts of the shutdown will become a new point of contention. The Congressional Budget Office (CBO) stated that if approximately 650,000 furloughed federal employees are included as temporarily unemployed, the unemployment rate would increase by 0.4 percentage points. As the shutdown enters its sixth week, economists say there's an increasing likelihood that the BLS may not be able to release the October Consumer Price Index (CPI) - a data largely dependent on in-person visits to businesses nationwide. Earlier, for the convenience of the Social Security Administration in annual cost-of-living adjustments, the agency had recalled staff to release the September CPI. However, no additional reports have been released since the shutdown began on October 1st. With the credibility of employment data in question and inflation data completely missing, officials who are more concerned about the labor market conditions will continue to push for further interest rate cuts, while those more concerned about price pressures will advocate for a pause, resulting in a deadlock. According to futures contracts, investors currently believe the former is more likely, with a possibility of over 50% of a rate cut in December. Analysts Stuart Paul, Andre Sokol, and Huang Anna said, "The US government shutdown has entered its second month, and the delayed employment report has not been released, so we have constructed a labor market index using available alternative labor-related data... The index shows that the US labor market continues to cool but at a slower pace." Supporters of a rate cut can refer to the widely watched private sector hiring data released by ADP - the data on Wednesday showed that job growth in October remained weak, primarily focused in the education and healthcare services sectors. On the other hand, Federal Reserve officials have also mentioned weekly jobless claims data - this data is still being compiled by state governments during the shutdown and has not shown significant growth. Meanwhile, with relatively limited alternative data from the private sector, government-released inflation data is more challenging to replace. In the absence of official data, investors in the $29 trillion US Treasury market also faced a similar dilemma this week - data released by ADP, Challenger, Gray & Christmas Inc., and Revelio Labs led to yield fluctuations in different directions. Ed Hussein, portfolio manager at Columbia Threadneedle Investments, said these conflicting data points underscore the tricky situation all stakeholders are facing. "The gold standard remains jobless claims and the official unemployment rate," Hussein said.