The Fed's Data Dilemma: Interest Rate Decisions in the Dark

The Federal Reserve is preparing to make a critical interest rate decision amidst extreme uncertainty, with almost no reliable economic data available to inform its policy. The government shutdown has halted the release of most U.S. economic statistics, including the closely watched monthly non-farm payroll report.

Loss of a Key Data Source

Adding to the challenge, the Fed recently lost one of its primary private backup data sources. ADP, the payroll processing giant, quietly stopped sharing its internal data with the central bank in late August. This deprives Fed economists of a real-time gauge covering approximately one-fifth of the U.S. private sector workforce. For years, this data served as a check on the state of the labor market between the Bureau of Labor Statistics' (BLS) monthly report updates. Erica Groshen, former BLS Commissioner, described the situation as leaving the Fed "flying blind."

Risks of Policy Missteps

Groshen, drawing on her decades of experience within both the BLS and the Fed, asserted that the loss of ADP data is "very worrisome for monetary policy." She cautioned that policymakers are already navigating a fragile economy, with Fed Chair Jerome Powell repeatedly stating there is no "risk-free path" to avoid recession or stagflation. The data void, she added, increases the risk of serious miscalculations.

Potential Consequences

"The Fed could over-tighten or under-tighten," Groshen stated, adding, "These actions tend to come too little, too late, but the less information they have, the more likely they are to do too little, too late."

End of a Fruitful Collaboration

Since at least 2018, ADP had been providing anonymized payroll and income data to the Fed free of charge, enabling staff economists to construct weekly measures of employment trends. This relationship was well-known to Fed insiders and casual market observers. However, according to *The American Prospect*, ADP suspended data access shortly after Fed Governor Christopher Waller referenced the data in an August 28 speech about labor market cooling.

Uncertainty Surrounding the Reasons

Groshen suggests that ADP may have had several plausible reasons for ceasing data provision. One possibility is that the company discovered a methodological issue in its data and wished to fix it before continuing to share information used for monetary policy. "That might actually be a responsible decision," she suggests. Another possibility is internal or reputational pressure. Following Waller's public mention of the collaboration, ADP may have been concerned about the impression it would leave on clients or shareholders.

Fragility of Public-Private Data Relationships

Regardless of the motivations, Groshen argues that this episode highlights how fragile public-private data relationships remain. With no clear framework or long-term agreements, companies can withdraw data at any time. "If policymakers are building systems around data that could disappear overnight," she concludes, "that's a real weakness in economic governance."

A Data Void at a Critical Moment

The timing of the data loss could hardly be worse. The Federal Open Market Committee (FOMC) will meet next week to decide whether to cut interest rates again after September's long-awaited pause. With the BLS having suspended the release of most data under its shutdown contingency plan, official figures on employment, unemployment, and wages have been delayed.

Reliance on Alternative Sources

In the absence of real-time data, Fed economists are relying on a variety of alternative data: state unemployment insurance claims, regional bank surveys, and anecdotal reports from business contacts. Groshen calls these data "useful but imperfect," adding that the lack of a consistent statistical baseline makes monetary policy more error-prone.

Call for Long-Term Funding

Groshen urges Congress to provide the BLS with "multi-year funding" so that it can continue operating even during government shutdowns. "I hope that the silver lining to all these difficulties is that all the stakeholders, including Congress and the public, realize that our statistical system is vital infrastructure and needs some TLC right now," she concludes.