Fed Faces Data Drought Ahead of Crucial Rate Decision

The Federal Reserve Confronts a Unique Dilemma

As the Federal Reserve gears up to determine interest rates next week, it finds itself in an unprecedented predicament: making critical decisions with a notable lack of economic data at its disposal.

A government shutdown has resulted in the suspension of many U.S. economic indicators, including the highly anticipated monthly jobs report. Compounding this issue, the Fed has also lost access to a significant private data source that it relied on for real-time job market insights.

In late August, payroll-processing powerhouse ADP quietly ceased sharing its internal data with the central bank. This development leaves Fed economists without a crucial real-time gauge that previously encompassed about 20% of the private workforce. For years, this data stream had acted as an essential intermediary, providing timely updates on employment conditions between the Bureau of Labor Statistics' monthly releases. The abrupt termination of this arrangement, first reported by the Wall Street Journal, has led former Bureau of Labor Statistics commissioner Erica Groshen to express serious concerns, stating that it leaves the Fed “flying blind.”

Concerns About Monetary Policy

In an interview with Fortune, Groshen emphasized that her extensive experience within the BLS and the Fed makes the loss of ADP data particularly troubling for monetary policy. She highlighted that at a time when policymakers are already grappling with a precarious economic landscape—Fed Chair Jerome Powell has repeatedly warned that there is no “risk-free path” to circumventing recession or stagflation—this data blackout significantly heightens the potential for critical errors.

Groshen remarked, “The Fed could overtighten or under-tighten. Such actions are often taken too little and too late, but with diminished information, they are even more likely to be executed inadequately.”

End of a Longstanding Collaboration

For several years, beginning in 2018, ADP had provided anonymized payroll and earnings data to the Fed at no cost, empowering the central bank's economists to develop a weekly assessment of employment trends. This collaboration was well-regarded among both Fed insiders and market analysts. However, according to The American Prospect, the cessation of data sharing occurred shortly after Fed Governor Christopher Waller referenced ADP’s insights during a speech on August 28 regarding the cooling labor market.

In light of this disruption, it has been reported that Powell has since reached out to ADP, seeking to restore the previous arrangement.

While ADP has not responded to Fortune’s requests for comments, the Fed has also opted not to comment on the situation.

Reasons Behind ADP's Decision

Groshen outlined several plausible theories regarding ADP’s decision to suspend data sharing. One possibility is that the company identified a methodological flaw within its data and opted to correct it before continuing to provide insights that influence monetary policy.

“That would be a responsible course of action,” she noted, explaining that private companies have greater flexibility compared to federal agencies but hold less institutional responsibility for transparency concerning errors.

Another potential reason for the suspension could stem from internal or reputational pressures. Following Waller’s public mention of the partnership, ADP may have grown concerned about how clients or shareholders might perceive their collaboration with the Fed.

“You could envision investors questioning, ‘Why are we offering this for free? The Fed has the resources to pay,’” she said, adding that the company may also aim to avoid the appearance of influencing central bank decisions, particularly in a politically sensitive climate.

As the Fed prepares for its upcoming meeting, the implications of this data void may have far-reaching effects on monetary policy, potentially leading to decisions that could shape the economy for years to come.