PIMCO: Fed policy in the fog of missing data

November 6, 2025

By Tiffany Wilding, Economist at PIMCO

The ongoing U.S. government shutdown has policymakers – and investors – operating without much of the timely official data that usually inform their decisions.

This could have a tangible impact on Federal Reserve policy in particular: Without crucial information on inflation and labor markets, the Fed could take a more cautious approach to interest rate moves while it awaits more clarity on the state of the U.S. economy.

A detailed review of the transcript of Fed Chair Jerome Powell’s press conference following last week’s Fed meeting suggests that the longer the shutdown drags on, the more the probability of a December rate cut diminishes, and January becomes more likely. Our base case is that the Fed will cut its policy rate at one of those meetings, bringing it to a range of 3.5%–3.75%. Beyond that, we believe it’s possible the Fed will pause at least until Powell’s term as Fed chair ends in May, as fiscal stimulus, including tax cuts and credits, supports the economy more forcefully in the first half of 2026. After that, the Fed could resume rate cuts in the second half of 2026 – assuming inflation is more clearly returning to the central bank’s 2% target, tariff effects fade, and risks to labor markets persist.

Labor market thresholds for Fed action

Last week at the press conference, Powell surprised market participants when he said a December cut was “not a foregone conclusion.” He cited the shutdown’s impact on economic data and linked another cut to further labor market deterioration (not just stabilization) – which likely means another uptick in the unemployment rate.

The last published household survey by the Bureau of Labor Statistics (BLS) showed unemployment at 4.3% in August, up from 4.1% in June. In September, the median Fed projection for the unemployment rate at the end of 2025 was 4.5% – so at that time, Fed officials were clearly concerned about negative labor market momentum. However, absent signs of a labor downturn materializing – which the Fed may not get due to the government shutdown – the Fed may determine a rate cut isn’t necessary in December.

Clashing policy and economic forces are weighing on the U.S. labor market

Monthly payroll growth has decelerated meaningfully this year from a roughly 100,000 per month pace of new jobs down to 50,000 (according to the most recent BLS reporting on the 6-month moving average of monthly net payroll gains after incorporating the preliminary benchmark revisions).

This dramatic decline has coincided with a similarly dramatic decline in population growth as policies under the Trump administration have reduced immigration and sought to limit the availability of or eliminate work permits. Based on these changes in population growth, we estimate that the number of monthly net payroll gains needed to keep the unemployment rate steady is currently around 50,000, down from closer to 200,000 at the height of the immigration-related population surge.

Since immigrants affect both the supply and demand for labor, the payroll growth decline this year has coincided with a more limited increase in the unemployment rate. Nevertheless, the unemployment rate has ticked up, suggesting falling labor demand is also having an effect. Since reaching a low of 3.4% in April 2023, the unemployment rate has since risen by 0.9 percentage points (ppts), as of the latest published BLS data.

This year, the ongoing economic adjustment to tariffs as well as the rapid diffusion of AI technology will likely drive the unemployment rate somewhat higher in the short run, even if these policies and trends create medium-term winners and losers. As we wrote in a September edition of Macro Signposts – “U.S. Labor Markets: A Release Valve for Tariff Pressure?” – we think companies are focused on cutting labor costs as a way to defend margins against tariffs. This focus on labor cost savings is also likely driving faster implementation of AI. In the short run, we believe this weak labor demand will drive a somewhat higher unemployment rate and stagnant payroll growth, with still-positive real GDP growth.

Labor data we’d expect to see under normal conditions

If the government were releasing economic data as usual, we believe we’d see additional factors weighing on labor market reports beyond the more general macro trends. For example, the September data (already collected) could show a pickup in labor activity as fewer late-summer seasonal job losses help offset the weaker-than-average summer hiring that accounted for at least some of the overall contraction in June.

Meanwhile, the October and November labor reports could be notably weaker due to a roughly 150,000 decline in government payrolls in October from employees who took the “fork in the road” severance package earlier this year. These workers could appear in unemployment counts.

Additionally, Supreme Court rulings allowing the revocation of the temporary protected status (TPS) of many immigrant workers from Venezuela eliminated an estimated 168,000 worker permits in October and another 125,000 in November. While this likely won’t directly affect the unemployment rate, it will weigh on payroll growth.

Finally, the technology and tariff impacts on trade sectors may also weaken or erase the seasonal hiring trends ahead of the holiday season in those sectors, potentially raising unemployment.

If and when the shutdown ends, how long before we have data?

As the shutdown continues, it’s unclear what information the Fed will have before it meets again in December. Even if the shutdown were to end tomorrow, the timing of data releases is far from certain.

The monthly labor market report, for example, compiles data from two different surveys: establishments and households. The establishment survey is electronic, allowing firms to submit October and November data together. The household survey (which informs the unemployment rate), by contrast, relies on actual surveyors, who would need to retroactively collect October and November data.

In 2013, the federal government shutdown delayed BLS data by two weeks; this time, retroactive collection over a month could challenge data quality. We estimate that if the shutdown lasts past 12 November, new labor reports may not be available until after the next Fed meeting on 9–10 December. So even if a decline in gross hiring is increasing unemployment in October and November, the Fed may not know it until after officials make their next policy decision.

On the other hand, if the government reopens soon, the Fed could receive a flood of labor market data before December.

Reading the Fed’s signals on the next rate cut

September’s Fed projections showed 10 committee members favoring at least 75 total basis points (bps) of cuts in 2025 – and the Fed has cut 50 bps so far – versus nine members favoring less. Powell was likely among the 10. With such a narrow majority, any member – including Powell – could hold back if there’s insufficient evidence of labor market deterioration.

Given these dynamics, if the shutdown continues to delay data releases, then there’s a good chance of the Fed holding rates steady at the December meeting. As Powell phrased it, “What do you do if you’re driving in the fog? You slow down. … The data may come back. But there’s a possibility that it would make sense to be more cautious about moving.”

In this case, the January meeting may be more likely for a rate cut (our base case is a rate cut at one meeting or the other). Unless the shutdown lasts through year-end, which we don’t expect, the Fed should have October/November employment data by January, and these reports will likely show further labor market deterioration.

Outlook for an end to the shutdown

At the outset of the government shutdown, there was no obvious catalyst to drive lawmakers to reopen. Both sides of the political aisle have shown little urgency. But now they face growing pressures: missed and delayed food assistance payments (which affect millions of Americans), rising health insurance premiums for Affordable Care Act enrollees, and troubling air traffic issues.

Our current estimate is that these pressures will most likely lead Congress to come to some resolution to reopen the federal government before late November’s Thanksgiving holiday. But the shutdown’s economic costs will deepen in the coming weeks, and the data desert will make it harder for both the Fed and market participants to gauge the U.S. economy’s resilience.