The Federal Reserve is at an unprecedented crossroads. It is trying its best to navigate the economy amid a deteriorating labor market and persistent inflation. The current federal government shutdown has closed off access to key economic data. Consequently, the Fed can’t conduct monetary policy very well. As New York Fed President John Williams recently said, we’re not facing a “data drought.” He cautions that the shutdown has added a level of complexity to what is already a difficult decision-making process for the central bank.
The Fed’s predicament is multifaceted. It confronts a housing affordability crisis and an uncertain job market, both of which undermine its efforts to stabilize the economy. Inflation is still persistently high. The Fed needs to walk a tightrope to avoid competing domestic pressures, all while operating under an increasingly adversarial spotlight on its independence from political will.
Economic Indicators Under Threat
As we’re in the midst of this government shutdown, since the start of October, the Federal Reserve has lost access to some very important economic indicators. This includes timely data like unemployment claims and retail sales data. This absence of data is reminiscent of the government shutdown in 2018-2019. During that difficult period, Fed officials used new measures such as card transactions and new vehicle sales to inform their decisions.
President Jerome Powell has almost confessed that some of these systemic problems are not within the Fed’s control. He said, “This is something that the Fed can’t fix.” His statement was just the latest reminder of the limitations of monetary policy in addressing our economic challenges that are largely structural.
The deepening housing affordability crisis is a daunting challenge for the Fed. Lawrence Yun, Chief Economist at the National Association of Realtors, calls it dire times for affordable home sales. The biggest problem, of course, is a huge inventory shortage. Rising home prices in various regions have made it increasingly difficult for potential buyers to enter the market, contributing to sluggish sales of previously owned homes for three consecutive years.
Labor Market Concerns
The overall job market has begun to slow down, a change that has been worsened by President Donald Trump’s self-destructive trade war. These policies have caused half of all currently operating businesses to pause future hiring plans and plan their next moves more conservatively. Laura Ullrich, an economist, lamented that the labor market has come to a standstill. People are confused, and an atmosphere of confusion is perpetuating this standstill and malaise.
Currently, as firms continue to deal with economic uncertainty along with high interest rates, hiring has turned soft. The uncertainty surrounding tariffs and their broader impact on the economy adds yet another layer of complexity. Until businesses get more confident, we’re likely to see a scarcer, more conservative approach to expansion and creating new jobs.
Beneath these challenges, there remains persistent resiliency in some sectors. The ISM’s September nonmanufacturing services survey confirms that client demand in professional services is still incredibly robust. Now with economic uncertainty and interest-rate volatility still hanging like a wet blanket, decision-making timelines are expanding. This contrast demonstrates that some sectors of our economy are adapting better to these challenging times than others.
Inflation and Housing Market Dynamics
As long as inflation stays persistently and unacceptably high, that will continue to be the Fed’s priority. The central bank must balance its monetary policy approach while considering external factors affecting economic performance. The persistent high cost of living is ongoing pressure on consumers and their overall discretionary spending.
With mortgage rates still high, the housing market is still in flux, especially as high mortgage rates continue to weigh on buyer demand. That has fueled an unprecedented crisis in housing affordability, making the Fed’s job that much harder. As you know, home prices are soaring in much of the country. For one, it increases the challenge for first-time buyers to seize an opportunity of their own.
In the face of these threats, John Williams is a cautiously hopeful prognosticator. I wouldn’t call it a data drought. As he pointed out, when access to traditional data sources is cut off, there are still other ways to figure out what economic conditions look like.