Chaired by Jerome Powell, the Federal Reserve is expected to make its next rate-cutting decision later this month. Photo by Chip Somodevilla/Getty Images
The impacts of a federal government shutdown that began yesterday (Oct. 1) are varied: some federal workers will go without pay, national parks will be partially closed, and even the Smithsonian’s National Zoo will cease broadcasting its livestreamed “animal cams.” The shutdown will also delay the release of key economic data, adding uncertainty to an upcoming Federal Reserve rate-cutting meeting.
The disruption, which stems from Republicans and Democrats failing to agree on spending bills, means that a Bureau of Labor Statistics (BLS) jobs report originally scheduled for tomorrow (Oct. 3) won’t be published on time. If the shutdown continues, it could also hold up the release of September’s Consumer Price Index report due next week.
Delaying such data could “thereby make the Fed’s next rate decision more difficult as policymakers may not be able to consider their usual full complement of information on how the economy is doing,” Brett House, an economics professor at Columbia Business School, told Observer over email.
The central bank faces a delicate balancing act when setting rates. Cuts are often made to counter a weakening job market, as was the case with the Fed’s quarter-percentage-point reduction last month, which lowered its benchmark interest rate to a range of 4 percent to 4.25 percent. That decision was influenced by a BLS report showing U.S. unemployment had climbed to 4.3 percent in August.
Conversely, rates are raised to rein in inflation, which remains above the Fed’s 2 percent target and is rising. Inflation came in at 2.9 percent for August, higher than July’s 2.7 percent.
“The shutdown could not have come at a worse time—this is kind of an inflection point where we know the labor market is softening, and we know that inflation is too high for comfort,” Kenneth Kuttner, an economics professor at Williams College, told Observer. “Flying blind on the employment front is going to really mess them up.”
The Fed signaled in September that two more rate cuts are likely by the end of 2025. But with the government closed, its next decision later this month could prove far more complicated—especially if the shutdown continues to block access to critical economic reports.
Kuttner believes the Fed should stick to its current plan of cutting rates by a quarter-percentage point at each meeting. “That’s what’s in line with what markets are expecting, and I think at this point they would probably not like to rock the boat in terms of financial markets,” he said.
How long could the government shutdown last?
Most past shutdowns lasted only a few days. Since 1981, the federal government has closed ten times for an average of nine days, according to a report from Callie Cox, chief market strategist at Ritholtz Wealth Management. But in recent years, shutdowns have tended to drag on. Of the last four, three lasted more than two weeks.
The longest shutdown in U.S. history was also the most recent. In 2018, during the first term of President Donald Trump, a standoff over border wall funding shut down the government for 35 days, costing the country an estimated $3 billion in lost gross domestic product (GDP).
Like today’s impasse, that shutdown also delayed economic data and threatened to complicate central bank policy. Jerome Powell, the Fed chair, said shortly before it ended that an extended closure could impact monetary policy. “We would have a less clear picture into the economy if it were to go on much longer,” he said at the time.
