The Shutdown Will Make the Fed’s Decisions Harder

0:00Gregory Korte:Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

0:41Gregory Korte:That's Vanguard.com slash audio. All investing and subject to risk, Vanguard Marketing Corporation Distributor.

0:48Molly Smith:Donald Trump is rewriting the Washington rulebook and reshaping the global economy.

0:54Gregory Korte:If you're trying to connect the dots behind the headlines, Bloomberg's Trumponomics podcast is here to help. I'm Stephanie Flanders, head of government and economics at Bloomberg. Every week, I'll bring you a smart, focused conversation with reporters and experts from Washington, Wall Street and beyond. Listen to new episodes every Wednesday and follow Trumponomics wherever you listen. Hey, everyone. It's Emily Simpson and Shane Simpson from the Legally Brunette podcast. Each week, we're bringing you true crime through a legal lens. Whether you want all the facts on the disappearance of Nancy Guthrie, or you still need to wrap your head around the ditty verdict, we're breaking it all down step by step.

1:37Gregory Korte:And we're not just lawyers. We're also husband and wife. It makes for some pretty entertaining episodes. Listen to Legally Brunette on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts. Bloomberg Audio Studios. Podcasts. Radio. News. The government shutdown started at midnight on Wednesday, but it'll take a while to feel its full impact. Gregory Cordy covers the White House for Bloomberg, and he says shutting down the U.S. government is a process.

2:08David Gura:Actually coming into work on Wednesday morning, there's more traffic in D.C. than there's been in a long time in this sort of post-COVID world that we're in, because federal workers who have been working from home have to come in to shut down the government, lock away their files, put their out of office on, meet with their boss one last time, make sure everything's set before they can go back home and be furloughed.

2:35Gregory Korte:And it's at that point, Gregory says, when you and I will start to feel the effects of a government shutdown in earnest. You'll call a government office with a question and no one will pick up. Some scientific research will stop. And some agencies that collect and disseminate data will stop doing that vital work.

2:53David Gura:I will give you one example of a very specific way that this could impact 70 million Americans. And that is that the October Consumer Price Index number is essential for the Social Security Administration to compute the cost of living adjustments for retirees who depend on Social Security benefits. Social Security Administration has not said how they're going to do that. If they're missing a month's worth of data, will they just use 11 months? Will they delay it? It's just a routine use of government data that happens. People don't think about it. But all of these mechanisms are built on government data.

3:27David Gura:And if you don't have the government data, then you can't adjust for inflation.

3:31Gregory Korte:Policymakers at the Federal Reserve also rely on those inflation numbers and on data about the labor market. The latest monthly jobs numbers were scheduled to be released on Friday. But because of the government shutdown, they won't be. Molly Smith is an economics editor at Bloomberg, and she says this is likely to make the Fed's next rate decision at the end of October all the more complicated.

3:54Molly Smith:Remember, the Fed just lowered interest rates for the first time this year. They've been thinking, OK, inflation has been running still well above target. But the last jobs report seemed to suggest that the labor market is starting to really falter a bit and that we've got to do something. And that's what all of this has been hinging on about expectations for another two cuts this year, expectations for any next year. It's really all about the labor market. And that so depends then on what the government's data says.

4:24Gregory Korte:I'm David Gurra, and this is The Big Take from Bloomberg News. Today on the show, a government shutdown impacts the economy and economic data. What that means for policymakers, investors, and everyday Americans who depend on it.

4:43Gregory Korte:The last government shutdown started in December of 2018, and it lasted for 35 days. Donald Trump was the president. And there's been a string of them, more than a dozen shutdowns since Ronald Reagan was in the White House. But when I sat down with Bloomberg's Gregory Cordy and Molly Smith, Gregory told me this one is unique.

5:03David Gura:It feels different for a number of reasons. One is we've seen more political polarization. We have Congress as closely divided as it's ever been in its history, just in terms of the division between Republicans and Democrats. But it's also different because this is a Trump shutdown in his second term where President Trump has decided to do things a little bit differently. And so this shutdown, he has threatened to not just furlough federal workers, but look for ways to fire them. In the first hours of the shutdown, the Department of Transportation uses an excuse to freeze$18 billion worth of infrastructure funding for New York City on the pretext that, well, we don't have the Department of Transportation contracting officials that can release this money.

5:48David Gura:So there may be a number of things where these were things the government did that the Trump administration didn't particularly enjoy doing in the first place, and the shutdown gives them a very convenient excuse not to do that. In the meantime, the things that they want to do, they have found ways to do them. And so one of the things that we found looking through these shutdown plans is it looks like fewer federal employees will be furloughed because they've gotten creative in finding other sources of funding and finding certain new legal interpretations to say, even though the law says Congress has said we can't spend money if it hasn't been appropriated by Congress, these are essential functions.

6:24David Gura:They've broadened that definition to allow more federal workers to show up to work even though they won't get paid until the shutdown ends.

6:32Gregory Korte:Motley, it's at moments like this one when I think a lot of Americans become acquainted with or reacquainted with all that the federal government does and how it interfaces with their lives. Economic data is a part of that. We think about what the Labor Department does or the Commerce Department. But really all of these agencies are producing data that's important. Could you just describe the impact a government shutdown has on their ability to collect and disseminate that data?

6:56Molly Smith:So this totally seizes operations across these federal agencies. And we've seen that in the most recent contingency plans that the departments released going into this shutdown. So for the Bureau of Labor Statistics, which is housed within the Labor Department, this is the one where we would get the employment report from every month, where we would get the main consumer price index. That's the key inflation gauge that we look to every month. These reports will not be coming out on time as scheduled. All of these data releases are going to be delayed, including the upcoming jobs report that was supposed to be scheduled for this Friday.

7:30Molly Smith:So it really just casts an even bigger cloud over the state of the economy right now because federal data is really regarded as the gold standard for how to gauge what's happening in the economy.

7:42Gregory Korte:Could you just sort of help us understand how these economic data are used across the economy broadly? Yeah.

7:50Molly Smith:So the big one, obviously, for people who listen to Bloomberg, is going to be whatever the Federal Reserve has to say. So everyone's really wondering then if this shutdown does last into those latter stages that we have a Federal Reserve meeting at the end of this month. Will they have the latest jobs report by then? Will they have the latest CPI by then? Will they have everything else that the BLS puts out that the agencies within the Commerce Department, like the Census Bureau and the Bureau of Economic Analysis puts out? We just don't know yet. But it affects everyday Americans, too. You know, economic data is maybe it's not something that regular people are using day to day.

8:27Molly Smith:But in certain industries and business planning and really all levels of government and all levels of decision and investment making, this is so crucial. A lot of people who work in construction or urban planning would want to know what kind of estimates there are if you were trying to do some kind of new residential or commercial construction project, for example. And you want to gauge what the local demographics are like to see, well, if we're going to be building an apartment complex, who lives in this area? What kind of wages do they make? What kind of commute do they do to work? This is all things that federal data point us to.

9:01Gregory Korte:Gregory, I know you've been sifting through contingency plans that we've seen from OMB, the way that the federal government is thinking about how this shutdown might unfold. When you look at past shutdowns, what can we learn? What can we ascertain from how they approached the release of data, the collection of data? this particular facet of what the federal government does?

9:19David Gura:Well, one thing that's different this time is this is the first shutdown that we've had since the Obama shutdown of 10, 15 years ago that has happened at the beginning of a fiscal year. And so we all know the jobs data comes out of the first of the month. The last time we had a long shutdown, it was over the holidays. It was kind of sleepy. That was pre-COVID. I don't think the Fed was watching the jobs numbers quite as closely as they are this time around. And so, frankly, a lot of federal data didn't come out in previous shutdowns and people didn't miss it quite as much. It's as much about this economic moment that we're in as it is about the shutdown.

9:55David Gura:But also, remember, there's a backdrop here where President Trump had fired the commissioner of the Bureau of Labor Statistics, has not been happy with the data that he's getting out of the Labor Department anyway. And so a shutdown means that we don't get the data, but it also means for President Trump that there's no chance of bad news coming out of his administration on the labor market, at least as long as there's a shutdown. And of course, that will catch up eventually. And those jobs numbers that we get when we do get them will include a good number of maybe 750 ,000 federal employees who will be unemployed during that stretch.

10:35David Gura:Not to mention maybe another 150 or more federal employees who took the deferred resignation program that expired at the beginning of this fiscal year as of Wednesday. Those are now off the federal payroll. And so there are going to be a number of shocks to the next jobs report when we get it.

10:56Gregory Korte:Coming up, what it'll mean for the Federal Reserve specifically not having new data on the U.S. economy, and what policymakers, economists, and investors will rely on instead of those government reports.

11:11Gregory Korte:Today's show is brought to you by Vanguard. To all the financial advisors listening, let's talk bonds for a minute. Capturing value and fixed income is not easy. Bond markets are massive, murky, and let's be real, lots of firms throw a couple flashy funds your way and call it a day. But not Vanguard. At Vanguard, institutional quality isn't a tagline. It's a commitment to your clients. We're talking top-grade products across the board of over 80 bond funds, actively managed by a 200-person global squad of sector specialists, analysts, and traders. These folks live and breathe fixed income. So if you're looking to give your clients consistent results year in and year out, go see the record for yourself at Vanguard.com slash audio.

11:53Gregory Korte:That's Vanguard.com slash audio. All investing is subject to risk Vanguard Marketing Corporation Distributor. Hey, everyone. It's Emily Simpson and Shane Simpson from the Legally Brunette podcast. Each week, we're bringing you true crime through a legal lens. Whether you want all the facts on the disappearance of Nancy Guthrie, or you still need to wrap your head around the ditty verdict, we're breaking it all down step by step. And we're not just lawyers, we're also husband and wife. It makes for some pretty entertaining episodes. Listen to Legally Brunette on the iHeartRadio app, Apple Podcasts, or wherever you get your podcasts.

12:30Gregory Korte:Hello, I'm Stephen Carroll. I'm in Brussels, where many of Europe's biggest decisions get made. And I'm Caroline Hepker in London with the hosts of the Bloomberg Daybreak Europe podcast. We're up early every weekday keeping an eye on what's happening across Europe and around the world. We do it early so the news is fresh, not recycled and so you know what actually matters as the day gets going. From Brussels, I'm following the politics, policy and the people shaping the European Union right now. And from London, I'm looking at what all that means for markets, money and the wider economy. We've got reporters across Europe and around the globe feeding in as stories break So whether it's geopolitics, energy, tech or markets you're hearing it while it happens It's smart, calm and to the point And it fits into your morning You can find new episodes of the Bloomberg Daybreak Europe podcast by 7am in Dublin or 8am in Brussels, Berlin and Paris On Apple, Spotify, YouTube or wherever you get your podcasts

13:33Gregory Korte:The Federal Reserve's rate-setting committee is scheduled to meet next on October 28th and 29th. And that'll happen whether or not the government is open. In September, Fed Chair Jerome Powell signaled he and his colleagues are open to another rate cut this year. But that will depend on the latest data, especially data on the jobs market. We're in a meeting-by-meeting situation. We're going to be looking at the data. The Fed has been dealing with policy uncertainty, whether it should cut rates and, if so, by how much. but it's also been facing personnel uncertainty. On Wednesday, the Supreme Court, which also stays open during a government shutdown, said President Trump can't fire Fed Governor Lisa Cook immediately.

14:13Gregory Korte:The court will hold oral arguments in January. I asked Bloomberg's Molly Smith about how the Fed is handling all of this uncertainty.

14:21Molly Smith:It's a really feisty time at the Fed right now, which is I feel like not a word we use a lot to describe the Fed. You know, it's usually the Fed, as well as some of these other agencies that I've named, tend to be, you know, they function best when you don't really hear about them. But there's just been so much changeover at the Fed recently. Obviously, with Lisa Cook's position, we had a different Fed governor resign recently, and that opened up a spot for Stephen Myron to come into. So that was one of Trump's top economic advisors who recently just joined the Fed. Of course, we have Chair Jay Powell's term ending next year.

14:57Molly Smith:There are all these moving parts right now that I think this maybe adds a little bit of stability at a time when there hasn't been a lot of stability at the Fed. So I'm sure there's going to be so much more on this to come that I don't think we've heard the last of what's happening with Lisa Cook yet.

15:10Gregory Korte:When Fed policymakers gather in Washington at the end of the month, they're going to review all the economic data they have. And I asked Molly what they'll rely on if they don't have a new jobs report or a new CPI report.

15:22Molly Smith:So there are a lot of other companies that they basically will look at their own metrics of their payroll providers, like ADP is one of them. Revellio will scrape through job profiles online. LinkedIn and Indeed do similar metrics using their own job platforms. This is basically what we're left with. We just saw a metric from ADP about their employment gauge in the month, which a lot of economists typically don't like to look to already because it doesn't closely align with what the BLS puts out. And then on top of that, they had some issues adjusting the data this time around. So that made it even more difficult to interpret.

15:58Molly Smith:But there are some other sources that compile announcements on layoffs. So I would say it's most expansive on the labor market side. There are a few on the inflation side, too. We do get some others on consumer spending. Probably the best of what we see is on the housing side. The National Association of Realtors is usually the go-to source for sales of existing homes in the U.S., and that's based on contract closings. And they also do a leading indicator based on contract signings. So we still do get a decent amount of housing data, granted not on the new homes or residential construction side.

16:34Molly Smith:That all comes from census. We do have all these private sector sources, but a lot of them rely on what the government has to say. They don't operate totally independently of what the Bureau of Labor Statistics has to say. So needless to say, there are still holes. They're just not going to add up to be the full picture we'd have otherwise.

16:52Gregory Korte:How did you read the numbers from ADP this morning? A miss compared to what the median estimate was? Saw revision from the last period as well. What does that tell you, bearing in mind what you just said, which is it's not going to give you the same picture that the Labor Department data would?

17:06Molly Smith:It was a particularly challenging ADP report to dissect because they also then used a separate measure from the BLS to readjust their data. So that resulted in the payrolls dropping as much as they did. They fell 32 ,000 in the month of September. Just for reference, economists that Bloomberg had surveyed had put in a median estimate of a gain of 51 ,000. So it was a bit challenging to get through to see what this meant with the data methodology. Some economists even said they couldn't totally make sense of it. And it just made it even more difficult to rely on what ADP has to say. Granted, if you just take a step back, though, I don't think this changes the overlying trend that we're seeing in the labor market, that it is weakening, that we are seeing pay gains soften.