US Govt Shutdown Puts a
Divided Fed in a Perilous Position
Some policymakers at the central bank
are in a rush to lower interest rates after the Federal Reserve’s first cut
this year, while others are urging caution.
Federal
Reserve's Dilemma Amid Government Shutdown
1. Data
Disruption Due to Shutdown
·
The Bureau of Labor Statistics will not release the
jobs report or CPI data if the shutdown continues.
·
This deprives the Fed of crucial data needed to
assess economic conditions before its next interest rate decision.
2.
Interest Rate Debate Intensifies
·
Fed officials are divided on how quickly to cut
rates.
·
The concept of the “neutral rate” — where policy
neither stimulates nor restrains growth — is contested:
o
Some see current rates (4–4.25%) as modestly
restrictive.
o
Stephen Miran argues they are “very restrictive”
and calls for a 2-point cut to avoid layoffs.
3. Impact
of Trump Administration Policies
·
Tariffs, immigration restrictions, and deregulation
may have lowered the real neutral rate to near zero, according to Miran.
·
Critics argue the economy is still resilient —
consumption is strong and layoffs are not widespread.
4. Risks
of Overshooting or Undershooting
·
Cutting rates too fast could fuel inflation,
especially from tariff-affected goods.
·
Moving too slowly could harm the labor market if rates are overly restrictive.
5.
Diverging Views Within the Fed
·
Jerome Powell supports gradual cuts as a
precautionary measure.
·
Others, like Lorie Logan and Susan Collins, warn
against excessive easing due to strong markets and credit conditions.
·
Several Fed presidents believe rates are already
near neutral and caution against over-accommodation.
6.
Shutdown’s Economic Toll
·
Each week of shutdown could reduce quarterly GDP by
0.1 percentage points.
·
Lack of official data complicates the Fed’s ability
to justify further rate cuts.
The
Federal Reserve was already facing a tough decision about how quickly to lower
interest rates after restarting cuts last month. But that judgment call is set
to get much harder if the government shutdown deprives the central bank of
essential data points that help it gauge the state of the economy.
The
Bureau of Labor Statistics has said it would not publish Friday’s hotly
anticipated jobs report. Other key data releases, including the next Consumer
Price Index report, are also in peril if Congress and President Trump do not
reach a deal soon.
That
would leave the Fed with a murky view of the economy when the central bank’s
officials are already at odds about its approach to interest rate cuts before
their next vote at the end of the month.
“It
pains me that we wouldn’t be getting official statistics at exactly a moment
when we’re trying to figure out is the economy in transition,” said Austan
Goolsbee, president of the Federal Reserve Bank of Chicago and a voting member
on this year policy-setting committee.
What
policymakers would like to know is just how much they are restraining the
economy with their policy settings. That assessment gets harder if they have
only alternative sources of economic data to parse.
If
interest rates are holding back growth only a little bit, the Fed may not have
much room to reduce borrowing costs before reaching what officials refer to as
a “neutral” level. That is one in which the Fed’s policy settings are neither
hastening economic activity nor hindering it. Getting there too quickly, or
overshooting that destination, would risk worsening inflationary pressures that
have originated from Mr. Trump’s tariffs. But if interest rates are restraining
growth significantly, policymakers might need to provide a lot of relief
quickly or risk jeopardizing the labor market.
“You’ve
got this huge disagreement about where neutral is,” said Stephen Stanley, chief
U.S. economist at Santander. “You can understand why some people are in a rush
and other people are not in any rush at all.”
A
long government shutdown would give policymakers one more reason to be worried
about the outlook, Mr. Stanley said. Economists estimate that each week that
federal operations are closed could shave about one-tenth of a percentage point
from the nation’s economic output that quarter.
But
the government shutdown is not the only risk that Fed officials have to manage.
A slowdown in monthly jobs growth has already amplified concerns about the labor market, although there is a range of views on just
how vulnerable it is given that the unemployment rate has stayed relatively
stable at 4.3 percent.
At
the same time, inflation has moved away from the Fed’s 2 percent target as
prices for items most exposed to tariffs have ticked higher. Many officials
foresee those pressures fading over time. But each round of tariffs, including
those the president recently announced on furniture, kitchen cabinets and
timber, could prolong the process.
Before
the shutdown, Jerome H. Powell, the Fed chair, signaled
his support for continuing to gradually reduce interest rates, which after
September’s cut are between 4 percent and 4.25 percent. The initial move was
part of a “risk management” strategy to prevent the labor
market from cracking further, he said. Mr. Powell later stressed that this was
insurance the Fed could afford to provide given his expectation that inflation
tied to tariffs would be only temporary.
Like
Mr. Powell, many officials continue to describe interest rates as “modestly
restrictive.” But not all policymakers see it that way.
Stephen
Miran, the newest member of the Fed’s Board of Governors, who is on temporary
leave from the White House, instead considers interest rates “very
restrictive.” He recently warned that failing to cut them quickly by two
percentage points would risk “unnecessary layoffs and higher unemployment.”
Mr.
Miran’s view rests on an assumption that the neutral rate is far lower than Fed
officials typically believe. Most officials see it around 3 percent, or 1
percent when adjusted for inflation. But Mr. Miran says that because of Mr.
Trump’s tariffs, immigration restrictions and deregulatory efforts, the
inflation-adjusted “real” rate is closer to zero.
For
Vincent Reinhart, a former Fed economist now at BNY Investments, Mr. Miran’s
argument is undermined because the economy, while growing more slowly, does not
seem on the verge of cracking. Companies are not laying off workers in droves,
and Americans are still spending.
“Based
on where consumption is, the neutral rate can’t be that low,” he said.
If
Mr. Miran is right, added Steven Blitz, chief U.S. economist at GlobalData TS Lombard, that suggests the administration is
harming the economy rather than bolstering it.
“His
message is that the administration has put in place a set of policies that is
going to slow growth unless the Fed cuts,” he said.
So
far, none of Mr. Miran’s new colleagues appear swayed. Instead, a group of Fed
policymakers have underscored the need to proceed cautiously with interest rate
cuts.
On
Tuesday, Lorie Logan, president of the Dallas Fed, warned in a speech that
there “may be relatively little room to make additional rate cuts without
inadvertently moving to an inappropriately accommodative stance.”
Susan
Collins, president of the Boston Fed and a voter this year, said record-high
stock markets and easy credit conditions were “giving a bit of a tailwind in
terms of economic growth” as she warned against lowering borrowing rates too
quickly.
Already,
Jeffrey Schmid, president of the Kansas City Fed, and Beth Hammack of the
Cleveland Fed think interest rates are very close to neutral. They have argued
that keeping some restraint on the economy is important to contain any
inflationary pressures stemming from tariffs.
Alberto
Musalem, president of the St. Louis Fed and another voter, added this week, “I
do believe we need to tread cautiously because the room between now and the
point where policy could become overly accommodative is limited.”
Clear
signs that the labor market is weakening would help
solidify the case for further interest rate cuts. But accumulating that
evidence will be harder the longer the shutdown lasts.
“It’s
not where you want to be when you are just restarting an easing campaign,” said
James Knightley, the chief international economist at ING. “You want to have
the justifications there to back up your decision.”