The Federal Reserve (Fed) seems prepared to go a step further and maintain their dovish policy pivot at next week’s meeting. There will be no dramatic shifts in the wording of the abbreviated, post-meeting statement. This prudent approach comes at a time of great economic uncertainty. A potential government shutdown now threatens access to these critical economic data releases for October.
Chair Jerome Powell is expected to reaffirm sentiments expressed in his public remarks on October 14 during the anticipated press conference following the meeting. His past remarks have reinforced the challenging act that the Fed is now attempting to juggle—increasing jobs while limiting inflation. These competing goals create a double danger to the economic outlook.
The longer and deeper current shutdown—now in the fourth week and counting—makes economic uncertainty more severe and harder to predict. Here’s the rule of thumb that economists like to use for government shutdowns. In their analysis, they estimate that every week of a shutdown reduces quarterly economic growth by an estimated 0.1 to 0.2 percentage points. That raises a huge red flag. Important employment and inflation data would be missing or missed altogether during this window, which would only add to the uncertainty in the Fed’s decision-making.
Additionally, both high-frequency survey data and recent seasonally adjusted federal employment figures indicate that the labor market is starting to slowly soften. This tendency further complicates the Fed’s policy deliberations. And inflation has been running at an underlying rate of 3% as of now. The connection between increased inflation and boosted job market engagement is tenuous and ambiguous. The Fed’s ongoing efforts to manage this tension may lead to challenges as they navigate potential repercussions from both inflationary pressures and labor market adjustments.
Powell suggested that QT might be nearing an end. He expects this decision to occur in the “forthcoming months.” If QT proceeds as planned through year-end, then the Fed’s balance sheet will have contracted by almost $2.5 trillion, or about 16 percent. This $23 billion cut is a historic reduction from its high water mark in the spring of 2022. This reduction has created significant upward pressure on long-term interest rates. Uncertainty among experts places the increase anywhere from 25 to 50 basis points.
The government shutdown just won’t end. Now, many are concerned we could lose some of the most important economic data for October completely—not just experiencing a delay. This situation greatly endangers good and faithful economic persuasion. More importantly, it would limit the Fed’s ability to respond aggressively to shifting conditions.
Despite these challenges, many analysts believe that most of the economic output lost during the shutdown will be recouped in the first quarter of 2024, assuming a resolution is reached soon. These immediate impacts are obvious and highly visible. This labor market softening appears to correlate almost perfectly with the current shutdown.