Shutdown Deprives Data-Dependent Fed of Data It’s Dependent On
(Bloomberg) -- Just when the Federal Reserve most needs fresh data to keep its policy in sync with the U.S. economy, the government shutdown is getting in the way.
Timely information on economic growth, jobs, consumer spending and inflation is always crucial to monetary policy making. Now, the longest shutdown on record is blocking the collection and reporting of many of these key numbers.
While fourth-quarter gross domestic product is due Jan. 30 -- as the Fed wraps up a two-day meeting -- a delay in the release is all but assured, given that the Commerce Department unit that produces the figures has been closed for a month.
Data Releases Jan. 16-31
|Retail Sales||Commerce Dept.||Jan. 16||Delayed|
|Housing Starts||Commerce Dept.||Jan. 17||Delayed|
|Jobless Claims||Labor Dept.||Jan. 24||On time|
|New Home Sales||Commerce Dept.||Jan. 25||Likely Delayed|
|Durable Goods||Commerce Dept.||Jan. 25||Likely Delayed|
|GDP||Commerce Dept.||Jan. 30||Likely Delayed|
|Personal Income and Spending||Commerce Dept.||Jan. 31||Likely Delayed|
The absence of some government figures is wreaking havoc elsewhere. Farmers aren’t getting Agriculture Department reports on crop supply and demand. Steel analysts don’t have the latest customs data that inform them about imports. And foreign-exchange traders are deprived of options numbers from the Commodity Futures Trading Commission that help them navigate the $5.1-trillion-a-day currency market.
The disruptions are especially problematic for the Fed right now, as policy makers are feeling their way toward a peak in the rate-hiking cycle -- a period when theoretical frameworks are less useful and fresh data become even more important.
Unlike a year ago, the economy is also giving off mixed signals. The labor market and consumer spending look strong, but slowing global growth, the protracted trade war and the shutdown itself have darkened the picture. In addition, the housing market is struggling amid elevated borrowing costs and price gains.
“It’s always true that you don’t know where you are, you kind of know where you were a month or two ago,” said William English, an economics professor at Yale University and former senior Fed adviser. The data gaps mean “now there’ll be just greater uncertainty about the state of the economy, and that clearly creates its problems for monetary policy.”
Fed policy makers have recently indicated they will take at least a pause from their quarterly pace of rate hikes. Analysts expect that the lack of timely and comprehensive economic data makes it even more likely the Fed will do nothing for several months.
“It clouds the picture of how the economy ended 2018 and how it is starting the year off,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co., who formerly worked at the Fed. “It’s just one more reason to be patient.”
Meanwhile, Fed officials frequently emphasize the central bank’s reliance on fresh economic data is growing. “Several participants expressed the view that it might be appropriate over upcoming meetings to remove forward guidance entirely and replace it with language emphasizing the data-dependent nature of policy decisions,” according to minutes of the December meeting.
New York Fed President John Williams last week issued a reminder, saying that gradually raising rates was the obvious and necessary choice at the start of 2018, when the economy was growing well above trend and interest rates were still quite low. But now the tailwinds have less impact, interest rates are closer to normal levels and inflation is tame, he said.
“The motto of ‘data dependence’ is more relevant than ever,” Williams said in a speech Friday. “How should the Fed respond to an outlook of slowing growth and one that’s less certain than, say, this time last year? In a word: carefully.”
The Fed isn’t completely in the dark. The Labor Department is funded and remains open, so its reports are on schedule, including employment and the consumer price index -- which showed inflation was relatively contained in December.
However, the Fed’s own preferred gauge of inflation -- included in the Commerce Department’s personal income and spending report due Jan. 31 -- will probably be delayed. That will make it difficult to know more precisely how close or far prices are from the central bank’s 2 percent goal.
For now, there’s only a patchwork of public and private data and anecdotal evidence to guide officials when they meet next week. Following the meeting, Fed watchers will look for any mention of the shutdown in the central bank’s policy statement. Recently released transcripts showed how officials had considered and rejected a reference to the shutdown in 2013.
English, who headed the Fed’s division of monetary affairs from 2010 to 2015, summed up the current situation with a reference to a rule of thumb put forward in 1967 by economist William Brainard: “If you’re uncertain about the effects of your policy, greater uncertainty means do less.”
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