Advisors warned the Secretary of the Treasury in a letter that the ongoing government shutdown has created an artificial calm in financial markets by delaying critical economic data.
The Treasury Borrowing Advisory Committee noted that once the government reopens and releases backlogged statistics, investors and policymakers could rapidly revise their economic outlooks.
The shutdown’s data blackout masks potential economic turbulence beneath seemingly stable markets. With inflation still elevated at 2.8% and job growth slowing dramatically, the absence of timely information leaves both the Federal Reserve and investors flying blind.
Markets have remained unusually quiet since July, with stock volatility hitting multi-year lows. The S&P 500 has climbed 16.3% this year while Treasury yields have fallen as the Fed cut rates in September and October.
Before the shutdown, warning signs of a deteriorating economy were emerging. Job growth averaged just 29,000 monthly from June through August, down sharply from earlier levels.
The Committee highlighted growing concerns about the calculations used for inflation data in Treasury Inflation-Protected Securities (TIPS). Multiple missed Consumer Price Index releases could disrupt the inflation swaps market and affect demand for these securities.
Fed Chair Jerome Powell suggested that core inflation might run closer to the 2.3% target, excluding the effects of tariffs. At the October meeting, Powell emphasized that a December rate cut is “not a foregone conclusion” and future cuts depend on incoming data.
The advisors also flagged rising short-term interest rates in October as reserves shifted from “abundant” to “ample” levels. The Treasury’s cash balance reached $1 trillion in late October, surpassing the $850 billion quarter-end target.
Looking ahead, the Committee recommended keeping Treasury coupon sizes unchanged but suggested increases might be warranted in fiscal year 2027. Federal deficits are projected to be $1.94 trillion for fiscal year 2026 and $2.05 trillion for fiscal year 2027.
Committee Chair Deirdre K. Dunn and Vice Chair Mohit Mittal signed the letter. Their analysis highlights how the shutdown has created a perilous information vacuum at a pivotal economic juncture.