A US government shutdown created a "data fog," making it impossible to form a view on short-term funding rates, a key driver for bond futures rolls. This forced J.P. Morgan analysts to neutralize their view on this factor and focus on other drivers like optionality.
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The recent government shutdown will create a permanent void in crucial economic data for October. While statistics like payrolls might be collected retroactively, survey-based data such as the Consumer Price Index (CPI) and household unemployment figures are likely lost forever due to recall bias, creating a black hole in the historical record.
A shutdown doesn't just delay data reports; if it extends into mid-month, it prevents the government from conducting the surveys needed for future reports. This disrupts the entire data collection pipeline, causing a ripple effect that can obscure economic trends for months after the government reopens.
The absence of official government data during shutdowns creates a 'data void' that heightens economic anxiety. Economists and the public are forced to over-rely on anecdotal evidence, like conversations with Uber drivers, which makes the economy feel more volatile and difficult to assess accurately.
A prolonged shutdown leaves the data-dependent Federal Reserve "flying blind." This uncertainty, combined with the shutdown's negative economic impact, creates a downside risk that reinforces the case for monetary easing. The lack of new data makes it easier to continue the current cutting cycle.
The Fed's data-dependent policy is hamstrung by the government shutdown. If the shutdown persists, the lack of data itself becomes a signal of economic harm, potentially forcing the Fed to implement an "insurance" rate cut based on assumption rather than evidence.
Unlike the 2018 shutdown, the Bureau of Labor Statistics may not have funding this time, potentially halting the release of non-farm payrolls and CPI data. This would leave the highly data-dependent Federal Reserve and markets "flying blind" at a critical monetary policy juncture.
The most significant danger of a prolonged government shutdown is the disruption to federal statistics. This creates an "unsettling" lack of visibility for policymakers, potentially causing them to miss a critical economic downturn and delay a necessary response. The direct GDP impact is often recoverable later.
Shutdowns halt the release of key data like jobs reports and inflation figures. This obstructs the Federal Reserve's ability to make informed interest rate decisions, creating market uncertainty. It also delays Social Security COLA calculations, impacting millions of retirees who rely on that data.
The Federal Reserve is not 'flying blind' during government shutdowns that halt official statistics. It uses a composite of alternative indicators for the labor market and inflation, providing enough of a signal to stick to its pre-planned policy path, such as proceeding with scheduled interest rate cuts.
Jerome Powell's "driving in fog" analogy highlights the Fed's strategy of using uncertainty, such as a government shutdown delaying economic data, to justify slowing down policy changes like rate cuts. This gives them flexibility to guide markets later through speeches without being locked into a specific path.
