US government shutdown puts Federal Reserve in bind

Divided central bank will be without key economic data as it considers further interest rate cuts

US Federal Reserve Chair Jerome Powell. EPA

The US government shutdown comes at a critical juncture for the Federal Reserve, which could be without critical data as it considers whether to cut interest rates later this month.

The government shutdown, which began shortly after midnight in the US on Wednesday after Congress failed to reach a spending deal, is halting several federal services and leaving hundreds of thousands of federal workers on furlough.

“The Fed is in a really tight spot,” said John Diamond, a senior fellow at Rice University's Baker Institute.

“They were already in a tight spot as they're struggling to deal with a dual mandate which looks like both sides are not optimal."

Fed officials have been debating which side of the dual mandate requires more immediate attention: inflation or employment. But now they could be without information needed to answer that question.

The Department of Labour, the economic data of which is closely monitored by the Fed and investors, has already said it will not release a highly anticipated jobs report on Friday. Contingency plans released by the Commerce Department showed that the Bureau of Economic Analysis and the Census Bureau will also stop most of their operations.

That means the Fed could operate blind during its meeting later this month.

Forecasts released by the Fed last month showed officials expect to cut US rates by another 50 basis points this year after reducing policy by 25 basis points in September, when previous data pointed to signs of a stalled-out labour market.

“A shutdown would likely leave the central bank in a fog about the labour market, fuelling support for an October cut rather than risk falling behind and having to cut more later,” Ryan Sweet, chief US economist at Oxford Economics, said in a note to clients.

Chicago Fed president Austan Goolsbee, a voting member on the Federal Open Market Committee this year, said the central bank would have to look for different data sources if the government shutdown forces the suspension of economic indicators.

“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,” he told Fox Business.

The absence of government data was likely to put greater emphasis on other data points, such as the ADP employment report on Wednesday. It showed US private-sector businesses shed 32,000 jobs last month, compared to the gains of 45,000 that economists polled by Dow Jones had anticipated.

Payroll numbers from August were revised down from 54,000 to a net loss of 3,000.

“Despite the strong economic growth we saw in the second quarter, this month's release further validates what we've been seeing in the labour market, that US employers have been cautious with hiring,” ADP chief economist Nela Richardson said in a statement.

Treasury yields fell after the surprise decline in September's private payrolls. The yield on the 10-year Treasury traded about 5 basis points lower at 4.10 per cent, while the yield on the 30-year dropped more than 2 basis points to 4.709 per cent as of 12.30am GST.

Meanwhile the dollar index, which measures the greenback against a basket of six major rivals, pared back losses from earlier in the day to fall 0.01 per cent. It has fallen more than 9 per cent this year.

“The dollar lost 1.5 per cent of its value during the last shutdown in 2018/19 … and it's entirely plausible that we could see a repeat performance should the current saga drag out in a similar manner,” wrote Matthew Ryan, head of market strategy at Ebury.

Meanwhile, gold continued its climb, briefly passing $3,900 an ounce during morning trading in the US.

Wall Street's major indexes, meanwhile, all ended in the green after trading closed on Wednesday, as investors hoped for a short government shutdown. The Dow Jones Industrial Average and Nasdaq Composite climbed 0.09 and 0.42 per cent, respectively, while the S&P 500 close above 6,700 for the first time at 6,711.20.

Mr Diamond said stock gains have been the only consistent factor in this time, although he suggested that is likely to do with hopes on artificial intelligence.

“[It] just seems to really be powering through all of this uncertainty, “he said.

Fed officials divided

The shutdown also comes as divisions within the central bank continue to emerge. Fed chair Jerome Powell said last week that, with inflation still running above target and employment slowing, the central bank faces “no risk-free path”.

Fed officials are largely split into separate camps on whether to focus on the inflation side of the central bank's mandate or the employment side.

Cleveland Fed president Beth Hammack, among the more hawkish central bankers, told CNBC last week that the central bank has missed its 2 per cent inflation goal for more than four years. Her remarks came days after the Fed's preferred inflation metric rose at a 2.7 per cent annual basis in August, slightly up from July.

“I continue to be worried about where we are from an inflation perspective,” Ms Hammack said. “I think we really need to maintain a restrictive stance for policy.”

Others, however, have expressed more caution on the employment side, suggesting that the nation's low unemployment rate of 4.3 per cent masks underlying issues in the labour market.

Despite this division, the Fed's vote to reduce policy by 25 basis points was near almost unanimous last week. Only newly confirmed, temporary Fed governor Stephen Miran, a top economic ally of President Donald Trump, dissented against the decision, voting instead to cut rates by 50 basis points.

Mr Miran's appointment to the board added to fears that Mr Trump could reshape the Fed, with which he has grown increasingly exasperated for not acceding to his aggressive rate-cut demands. The Fed has moved cautiously this year on rates, pointing to uncertainty caused by Mr Trump's tariffs agenda.

Meanwhile, the Supreme Court ruled that Fed governor Lisa Cook can remain on the job for now pending arguments in January. Ms Cook sued President Donald Trump after his attempt to remove her from the Federal Reserve Board in August over mortgage fraud allegations, accusations she has denied.