The U.S. economy faces significant challenges following a recent government shutdown that began at 12:01 a.m. ET on Wednesday. The shutdown has prevented the release of any important economic data. Consequently, the Federal Reserve finds itself in a very difficult position as it prepares to convene later this month to set interest rates. Combined with other recent reports, this means that the economy added 911,000 fewer jobs in 2024 and the beginning of 2025 than we previously believed. This sudden plunge in hiring is very worrisome and stagflation indeed may be right around the corner.
With inflation still at four-decade highs, the economic policy landscape has become much more complicated. The recent jobs report highlighted a significant decrease in hiring for August, reflecting a labor market that has entered a lackluster period. Yet economists are still deeply unpacking what these changes mean. This has them especially worried as the perfect storm for stagflation—a dangerous cocktail of stagnant economic growth and high inflation—begins to brew.
The Senate’s failure to pass funding proposals from both parties has triggered the shutdown, complicating the Federal Reserve’s ability to make informed decisions regarding interest rates. As the central bank looks toward its upcoming meeting, it faces a stark dilemma: how to navigate a landscape without crucial data on employment and inflation trends.
“If data continue to be unavailable a few days before the next meeting, that would be a significant source of concern,” – Darrell Duffie.
The Federal Reserve is already facing enough pressure from the same economic indicators mentioned above. Just last month, Jerome Powell, chair of the Federal Reserve, reaffirmed that high inflation is still a threat. He pledged to do more to prevent prices from continuing to rise. Other economists are calling for at least two more interest rate cuts this year to stimulate growth. Some have made the case to maintain status quo— no increase, and no cuts at all.
Yeva Nersisyan, an economist, remarked on the difficulties presented by the current situation: “This makes life harder for the Fed.” Without important economic data, policymakers will find it difficult, if not impossible, to evaluate the general well-being of the economy.
In the meantime, economists are divided—with some arguing that delays in data would not change the way they make decisions.
“If I were the one making the decision looking back at the data we have, I don’t think another month’s data will matter that much,” – Nersisyan.
Together, these make for a challenging economic environment and a tricky tightrope act for the Federal Reserve. As inflation creeps up and job growth starts to fizzle, finding the right balance becomes all the more critical. Duffie pointed out that “it is a delicate time to lose access to data because there is some apparent disagreement” among economists regarding how best to address these challenges.
Uncertainty still looms over the employment and inflation data. This will certainly test the Fed’s stated commitment to establishing a transparent monetary policy strategy. Yet the recent government shutdown further complicates what was already a new and tenuous economic environment. This turn of events has left many analysts and policymakers understandably terrified about where this might lead the U.S. economy in the coming years.
