As the U.S. federal shutdown (temporary suspension of work) enters its third week, warnings have emerged that the U.S. Federal Reserve (Fed) will fall into a blind spot.
Analysts say that the credibility of consumer price index (CPI) data, a key price indicator, has been severely damaged since October, facing a dilemma of deciding monetary policy based on inaccurate statistics by the first half of next year.
Hana Securities predicted in a report on the 23rd that the September CPI, which will be announced belatedly on the 24th (local time), will not prevent the Federal Open Market Committee (FOMC) from deciding to cut interest rates in October.
Chairman Powell and other key Fed figures have already weighed in on weakening the labor market, so the justification for the rate cut is sufficient unless the CPI in September deviates significantly from expectations.
The real problem is the October CPI, which is scheduled to be announced on November 13. This is because the prolonged shutdown has directly disrupted data collection by the Bureau of Labor Statistics (BLS).
In particular, housing cost data errors, which account for the largest proportion of CPI, are expected to be serious. BLS divides the housing cost sample into six panels and surveys it in a six-month cycle, and it is highly likely that the data collection of the panels (the last survey in April) that should be investigated in October was incomplete due to the shutdown.
The bigger problem is that this data distortion is not just a one-off. BLS calculates the rate of change in housing costs by combining all six panel information, and the error data of the October panel will continue to affect housing cost statistics until six months after the same panel is re-examined (April next year). It is estimated that the data will be fully normalized in May next year.
To make matters worse, CPI data quality was already on the decline even before the shutdown. The "number of data inappropriate to publish" released by BLS has increased from an average of 13 during the Biden administration to an average of 18 during Trump's second term. In terms of the three-month average, it is the highest level since the start of statistics publication in January 2019.
In the end, the Fed is in a situation where it has to make policy decisions based on "estimated prices" without identifying the exact inflation trend.
Hana Securities, however, diagnosed that the center of gravity of monetary policy has already shifted to signs of a slowdown in the real economy rather than confusion in indicators such as CPI.
Heo Seong-woo, a researcher at Hana Securities, said, "The gradual slowdown in the labor market and weak consumption are areas that the Fed cannot overlook. Even if data uncertainty is maximized, there is enough justification for the Fed to cut interest rates to preemptively manage downside risks in the real economy."