By Derek Horstmeyer

About the author: Derek Horstmeyer is a professor of finance at George Mason University's Costello College of Business.

The Federal Reserve faces a problem of data reliability.

It is an issue that has just been made much more severe with the closing of the federal government and, more specifically, the Bureau of Labor Statistics. Accurate pricing data, labor estimates, and other economic information are the cornerstone by which the Fed sets its policy decisions. Absent this information, the Fed is at a considerable disadvantage on how to guide inflation expectations and the overall economy.

If the government can't deliver what the Fed needs, it may be time to turn to the free market. Creative use of prediction markets and futures contracts could help the Fed overcome its blind spots.

It is hard to deny that the economic data problem the Fed faces has gotten worse over time -- much before the government shutdown on Oct. 1. Survey response rates have dramatically declined in recent years, predating the Covid-19 pandemic. Over the past two months, the BLS has had to massively revise labor statistics because of survey response delays, causing equity markets to plummet. Depressed response rates are also impacting the Bureau of Economic Analysis's pricing data that the Fed needs for inflation estimates. While the Fed can and does look at privately-collected data, that data isn't fully reliable because they use "different levels of rigor," Fed Chair Jerome Powell said at a conference on Tuesday.

None of these issues aren't improving -- and all indicators suggest they will only get worse.

Since the shutdown started, the BLS has recalled some of its staff to help produce the consumer price index data that the Social Security Administration needs to make its cost of living adjustments. But one more CPI report won't fix the underlying issues in the data. Add on top of that the AI revolution: As AI is rolled out, the labor force will almost certainly change in ways that may be less than transparent to the Fed.

Absent accurate inflation data and labor statistics, members on the Federal Open Market Committee will be hand-tied on setting rates and constantly behind the curve when it comes to decision-making. With no resolution to this data problem in sight, what can the Fed do?

Well, difficult times require drastic measures. Perhaps it is time to let market participants and investors with inside information about the economy fill in the data gaps and inform the Fed. One avenue is to harness a market-based solution -- listening to what market participants are saying about where rates should head via their own bets in futures and betting markets.

Typically, the Fed plays a game of back and forth with investors, simultaneously guiding them on where they see rates going but also listening to investors on what their expectations are. If data isn't reliable at the Fed level, it might be better to lean more into listening more to investors to hear what they have to say.

Here is where prediction markets and futures markets come into play. Via these markets, investors can place wagers on where they see the economy going in terms of gross domestic product, inflation, and any other metric that the Fed may want to have data on. All the Fed would need to do is create various futures contracts on these types of data and then encourage investors to wager on them. The more insiders (those with direct information on where things are headed in our economy) that the Fed can encourage to make bets in this market, the more accurate information the Fed will have at its disposal.

One can think of the Fed as encouraging the use of contingent contracts. This sort of contract, for instance, would say "if the Fed raises rates by a quarter point next month, we will see GDP fall to 2% over the next year." Financial contracts that span the whole slate of economic outcomes and the bets on these contracts will give the Fed insight into where market participants see the economy heading, via the price they set on each contract.

It is true that this would be a big shift in how the Fed interacts with markets. It may be best to roll it out slowly, with trial periods and plenty of forewarning to markets.

And yet, betting markets are increasingly becoming a viable path. They are entering the mainstream: The New York Stock Exchange's parent company, Intercontinental Exchange, just took a $2 billion stake in Polymarket, one of the world's largest prediction exchanges. More than $300 million was wagered on the latest Fed cut on major betting platforms, such as Kalshi and Robinhood. Harnessing these exchanges and the wisdom of the crowd will become a better option over time as more professionals flock to these exchanges to hedge their own investment risks.

In a world where the Fed isn't being given timely information, perhaps the next best option is to allow those with information -- market participants -- to inform the Fed on the best course of action.

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October 14, 2025 14:18 ET (18:18 GMT)

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