We’ve entered the fourth week of the US government shutdown, with no end in sight.

The shutdown is very consequential for the Fed, which is cut off from new economic data as the gridlock continues.

And the timing could not be worse: the shutdown leaves the Powell & Co flying blind when the Fed’s monetary policy continues to be critiqued by government officials (especially President Trump) and US investors.

What Does the Data Say?

The Fed may be missing new economic data, but its main dilemma hasn’t changed: inflation is increasing while growth is slowing.

Change in CPI has trended back toward 3.0% since April. The uptrend comes as consumer spending has exceeded expectations and Trump’s tariffs are starting to show up in prices.

At the same time, nonfarm payroll growth has fallen off a cliff since May.

To make things harder, certain trends are making interpreting existing data difficult:

1. Immigration Policy - Tighter US immigration policy is likely driving the steep decline in payroll growth. This makes it harder to compare payroll trends to past data, which was under very different immigration conditions

    

2. Data Center Capex - Big Tech is pouring hundreds of billions of dollars into data center construction across the US. In the first half of 2025, data center investments contributed the same amount of GDP growth as consumption for the first time ever

The economy is in a weird spot. Consumers are straining, as evidenced by rising delinquencies and lower sentiment, but the AI boom is helping to keep things afloat.

And meanwhile, inflation is heading in the wrong direction.

Where is the Fed Going?

The Fed cut rates to the lowest level in three years on Wednesday, bringing the Federal Funds rate to 3.75%-4.00%.

Notably, Powell’s remarks made it clear that further rate cuts are very much in question:

Powell’s comments underscore the challenge of monetary policy today: the health of the economy is unclear.

• Payroll growth has been weak, but GDP growth has remained resilient

• Consumer delinquencies are rapidly increasing, but consumer spending has held up

• Freight volumes are at recession levels, but hundreds of billions of investment is powering huge growth in data centers and ancillary sectors

As the Fed keeps flying blind, it faces the harsh reality that there is no good answer.

Cutting rates risks sparking more inflation, but holding rates may tip over the economy as hiring slows and layoffs start to bite.

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