Shutdown Could Be Serious Mistake, Eric Rosengren Warns

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00:00When we think about that next Fed meeting, I would love to hear your perspective. As a former

00:04policymaker, how much did you rely on alternative sources of data, private reports, for example,

00:11versus the official government data that would come out about the labor market?

00:16So there tends to be a focus on official government data, though we certainly use

00:22data from private sources as well. So, for example, the ADP report that came out yesterday,

00:30people would certainly look at it, but they'd put much more weight on the employment numbers coming

00:35out of the employment situation report, which comes out on Friday in normal circumstances.

00:42But when there's a government shutdown, you have to rely on whatever data you can get your hands on.

00:48So I think we're in a period where more reliance on private data is going to be necessary

00:53until the shutdown is over. And you look at the different pieces of private data that we are

00:59getting. You mentioned the ADP report that showed that private companies shed 32,000 jobs in

01:04September. You had interesting reports coming from Challenger today. You also had a separate

01:09report from a company called Revelio Labs, which I admit I'm not too familiar with, showing that the

01:15economy actually added jobs in September. So it feels like they're all telling different stories.

01:20And in your experience, I mean, how good of a picture can you throw together,

01:25they're cobbled together, of how the economy is actually doing from these different private sources?

01:30How does that typically compare to the official government data?

01:35So it's certainly not optimal, particularly given that the U.S. economy

01:39in the first half of the year weakened relative to the second half of last year.

01:45So we already have consumption that's grew in the first half of the year, only by 1.6%.

01:52That was roughly half of what it was the second half of last year. We have government spending

01:59that's also being cut back. And it looks like the consumer is pretty weak. So a number of the

02:07conference board came out earlier this week, consumer confidence was weak. So we already know that

02:14consumption probably won't be all that strong. And then we're going into a shutdown where certainly

02:19government workers are not going to be interested in spending very much money because they don't know

02:23when they're going to get paid. And on top of that, there's a threat that a number of the government

02:28workers are also going to be laid off. So there's a good reason to believe that consumption is going to

02:34continue to be weak. Certainly if there are both a shutdown and layoffs, government spending in the

02:40second half of the year is also going to be weak. So you already know that there's going to be a relatively

02:46weak economy and that more than likely labor markets are going to be weaker than we want. The problem for the Fed

02:52is that we're also seeing that inflation is going up. So the PCE, which is what the Fed tends to focus on,

03:00particularly the core PCE, was up a little bit. Is that 2.9 percent? If you look at both private and the Fed

03:06forecasts, the expectation is that we'll end the year over 3 percent, that is higher than the Fed would

03:15like. It would like a 2 percent inflation rate. So it's still a difficult meeting for the Fed because

03:20it probably has a weaker employment report if we actually were to get one. And it also is a situation

03:28where the inflation data we've had to date, on top of the fact that we know that the tariffs are beginning

03:34to flow through to final goods is an environment in which it's missing both of its mandates and has

03:42to trade off those two challenges. I am curious about what the discussion ends up being. I know

03:46we're still a long way from the next Fed meeting. We still have like four weeks or so before we get

03:50there. But if you go into that meeting with the shutdown and when you were Boston Fed president, I

03:55think you went through at least two or three government shutdowns, certainly the two that we had

03:59in 2018. And that was a time where, if I remember correctly, the Fed was raising rates and trying

04:05to make a decision about whether to continue to raise rates. So how much does the impact of a

04:11shutdown or the speculation about a shutdown affect the policy decision making? Well, you know that it

04:18weakens the economy. It means that GDP for that quarter is going to be weaker. And if you're at a

04:24turning point like possibly we are now, it runs the risk that we make a mistake. So let's say that

04:33you do a 25 basis point cut because the labor market's weak, even though inflation's a little

04:39bit too high. If this employment report would have indicated that payroll employment was declining

04:45substantially and unemployment was going up rapidly, that might be an environment where you'd be

04:51seriously considering 50 basis points. I think given that inflation's high, it's pretty. And with the

04:57data only being the ADP report, it's pretty challenging for the Fed to make a big move without better

05:04knowledge. So there's greater uncertainty, but there's uncertainty on both elements of the dual mandate.

05:10I think that the Fed will be pretty tentative at this next meeting. Yeah, we're in an environment where

05:16there's still a shutdown. I am curious about how much federal employment actually affects our economy

05:23when we use this number of 750,000 folks being furloughed. And of course, we're now learning

05:29based on news reports that some of those jobs could be actually permanently reduced. I know that's still

05:34less than what a quarter, I think, of the total federal workforce. But there has to be some sort of

05:39tentacles to come out of that that affects the broader economy. Is it material?

05:43I think it is material. So certainly the federal workers are going to cut back on their consumption

05:52patterns, whether they don't know exactly who's going to be laid off, if anyone's going to be laid

05:58off. They don't know how long they're not going to be paid for. But it's not just the government

06:03workers. It's also all the government contractors and the private sector employees that now are not also

06:10going to be paid by the government. And some of those cutbacks presumably are for the public sector.

06:17But there are also maybe cutbacks in contracting to the private sector. So there's a reasonable chance

06:23that this is more extensive. And given that the economy already was weak, I think it does risk,

06:30depending on how it's handled, having a more severe outcome than would be desirable. So the risks of a

06:37recession definitely go up. When you have a shutdown, you have less information. And if the economy already

06:43wasn't a possible turning point, it could be a serious mistake to allow the shutdown to continue

06:49for a long period of time.

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