How the government shutdown complicates the Fed's rate cut options

Core Insights - The ongoing government shutdown is complicating the Federal Reserve's ability to make informed decisions due to a lack of critical labor market and inflation data [1][3][10] - The Fed may need to pause its decision-making process until more reliable data becomes available, which could lead to increased market volatility [3][9][10] Labor Market Analysis - There are signs of a slowdown in the labor market, but the Fed is uncertain whether this trend is stabilizing due to missing data [2][4] - Alternative data sets are available, but they do not fully compensate for the absence of official data, leading to uncertainty in estimating payroll changes [10][11] Economic Impact - The government shutdown is estimated to create a quarterly GDP drag of approximately 10 basis points per week, equating to about $400 million per day in lost federal worker compensation [6] - The integrity of economic data, such as the Consumer Price Index (CPI), is being compromised, with a significant increase in the percentage of estimated goods in the CPI basket [4][5] Market Reactions - If the Fed decides to hold off on rate cuts due to the lack of data, it could negatively impact market sentiment, as investors have been pricing in expected cuts [8][9] - Despite the uncertainty, underlying earnings remain strong, with growth estimates for Q3 rising from 8% to 8.8%, indicating resilience in the market [14][16]