"Data gaps" disrupt rate cut plans, Goldman Sachs: Originally it should have been "rate cut in December, pause in January," but now it's uncertain.

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The absence of key economic data is causing the Federal Reserve and bond markets to "fly blind," forcing investors to reassess the likelihood of a Fed rate cut in December. Goldman Sachs analysts warn that insufficient data has disrupted the previously expected pace of rate cuts, and the prior expectation of a "December rate cut, pause in January" now faces significant uncertainty.

Market pricing for a December rate cut has now dropped below 50%. Although U.S. government reopening means economic data will be released gradually, investors still face multiple data gaps: the October nonfarm payrolls report may not be published, the November employment report may not be available before the December FOMC meeting, and inflation data may also be missing. In the absence of data, the U.S. interest rate market is in wait-and-see mode, with 1-year forward 1-year rates fluctuating in a narrow range.

This data vacuum has directly impacted the market's previously expected policy path. Goldman Sachs originally predicted the Fed would implement three "insurance" rate cuts, then pause in January next year, but the lack of data has made this expectation uncertain. Goldman Sachs points out in a research report that with very little data to support, the U.S. rates market is in a wait-and-see mode.

Downside risks in the U.S. labor market persist, especially as it is difficult to accurately assess the impact of artificial intelligence on employment, inflation, and the neutral interest rate, further increasing the complexity of the policy outlook.

Increasing Labor Market Risks

Despite the scarcity of data, current indicators show that the labor market is facing downward pressure. According to Challenger's report, October private sector layoff announcements rose to the highest level outside of recession periods.

Goldman's layoff tracking index shows layoffs increased in October and are now above pre-pandemic levels. Regression analysis based on the layoff tracking index and other indicators shows that risks of labor market deterioration have recently increased. The probability of the unemployment rate rising by 0.5 percentage points or more over the next six months is 20-25%, compared to just 10% six months ago.

AI Impact Increases Policy-Making Complexity

The widespread use of artificial intelligence has added new complexity to Fed policy-making. Goldman Sachs analysts say it is very difficult to accurately model the exact effects of AI adoption on inflation, the labor market, and the neutral interest rate.

Recent corporate Q3 earnings calls show that after discussing AI technology, companies have seen a noticeable increase in layoff discussions. This trend is spreading from the tech sector to other industries, and the impact of AI on the employment market may be broader than expected.

As it is impossible to determine the true extent of AI adoption and its impact across all facets of the economy, the Fed is facing unprecedented challenges in formulating monetary policy. This further increases policy-making uncertainty.

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