Former BLS chief warns Powell is ‘flying blind’ at a pivotal time for the Fed

The Federal Reserve faces an unprecedented challenge in setting interest rates next week, operating with severely limited economic data due to both the government shutdown halting official statistics and payroll processor ADP ceasing its provision of real-time employment data. This data vacuum, which previously covered a fifth of the private workforce, leaves the Fed 'flying blind' at a critical juncture, raising significant concerns among economists about potential monetary policy missteps, such as over- or under-tightening, in an already fragile economic environment.

Analysis

The Federal Reserve faces an unprecedented challenge in its upcoming interest rate decision, operating with a severe data vacuum. This critical situation stems from two simultaneous events: the government shutdown halting official U.S. economic statistics, and payroll processor ADP's cessation of real-time employment data sharing since late August. ADP's data previously provided a crucial real-time measure covering approximately one-fifth of the nation's private workforce, leaving the Fed significantly less informed.

This data blackout significantly elevates the risk of monetary policy missteps, as highlighted by former BLS commissioner Erica Groshen, who stated the Fed could be "flying blind." With Fed Chair Jerome Powell already acknowledging a "no risk-free path" for the fragile economy, the absence of robust data increases the likelihood of over-tightening or under-tightening actions. This situation is particularly sensitive, preceding an FOMC meeting next week to consider further interest rate adjustments.

ADP's motivations for withdrawing its data remain speculative, ranging from potential methodological concerns to reputational pressures after public mention by Fed Governor Waller. This episode underscores the inherent fragility of public-private data relationships, creating a systemic vulnerability for economic governance when policymakers rely on data that can vanish unexpectedly. Fed Chair Powell has reportedly asked ADP to reinstate the arrangement.

Key Decisions for Investors

• Investors should anticipate heightened market volatility and uncertainty surrounding the upcoming FOMC decision due to the Fed's severely limited economic data.
• Monitor Fed communications closely for any indications regarding their reliance on alternative, less comprehensive data sources and their assessment of economic conditions.
• Consider adjusting portfolio allocations to account for increased monetary policy risk, particularly in interest-rate-sensitive sectors, given the elevated potential for policy missteps.