If there is still no data by December, does that mean the Fed will have to "cut rates with its eyes closed"?

If there is still no data by December, does that mean the Fed will have to "cut rates with its eyes closed"?

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The ongoing U.S. government shutdown is putting the Federal Reserve in an unusually difficult position. If key employment and inflation data are still missing ahead of the December policy meeting, policymakers may be forced to make crucial interest rate decisions in an “information vacuum,” greatly increasing the likelihood they blindly cut rates along the previously established dovish path.

According to Chase Wind Trading Desk, based on a report released by Bank of America on October 28, the scenario of the Fed being “completely in the dark” during the December meeting is becoming increasingly realistic. The report points out that not only is there no progress in ending the government shutdown, but even if the government reopens, it may still take months for the data flow to return to normal.

This lack of data has intensified divisions that already existed within the FOMC. A dovish camp, possibly including Chair Powell, may stick to the rate-cut path indicated in the September “dot plot.” However, hawkish members of the Committee are likely to oppose a third rate cut within the year in the absence of fresh evidence of economic weakness.

For investors, this unprecedented uncertainty makes the risks of the December meeting much higher. The final policy decision may no longer depend on the latest economic indicators, but rather rely more on a divided committee weighing old expectations against new risks. This could result in both hawkish and dovish members casting dissenting votes at that time, bringing greater volatility to market expectations.

Missing Data May Intensify Internal Divisions

Bank of America’s analysis believes that the September FOMC meeting already exposed deep divisions among policymakers in assessing downside risks to the labor market. At that time, a narrow majority believed these risks were sufficient to support at least 75 basis points of rate cuts within the year.

In the absence of new data, the dovish group is highly likely to push for fulfillment of the September dot plot expectations. The report says that some dovish members may even believe that a prolonged government shutdown by itself amplifies downside risks to economic activity, thus offering yet another reason to support a rate cut.

However, the hawkish forces within the Committee should not be underestimated. The September dot plot showed that seven FOMC participants supported only one rate cut this year. Bank of America believes this camp includes voting members Barr, Goolsbee, Musalem, and Schmid. While they are unlikely to raise objections to a rate cut at this week’s meeting, pushing for a third rate cut in December may be “a step too far” for them—especially as state-level unemployment claims remain within a stable range. This increases the risk of at least one hawkish dissenting vote in the December meeting; additionally, dovish member Miran may also cast a dissenting vote.

The Timing of Data Recovery Determines Policy Path

The Fed’s final decision in December will highly depend on when the government shutdown ends and how quickly economic data can catch up. Bank of America has outlined several scenarios:

  • Scenario 1: An “outdated” September employment report available before the end of November. If the government reopens before the end of November, the market should be able to see the September employment report before the December meeting. The report believes that weak data would reduce the risk of hawkish dissent, but even if the data are strong, it is unlikely to persuade Powell to pause rate cuts, as the report will be considered “outdated.”
  • Scenario 2: Both September and October employment reports available in early November. If the shutdown ends in early November, allowing the Bureau of Labor Statistics (BLS) time to release two reports before the December meeting, the situation becomes more complex. In this case, if the unemployment rate remains steady at 4.3% and economic activity data for September and October are robust enough, “pausing rate cuts” in December becomes a possible option.
  • Scenario 3: Full catch-up with three employment reports available. The ideal situation is that the government ends the shutdown quickly, and the BLS is able to conduct surveys for both October and November, thus releasing all three employment reports—September, October, and November—before the December meeting. In this case, Bank of America offers a decision-making rule of thumb: if the November unemployment rate is less than or equal to 4.3%, the Fed will keep rates unchanged in December; if the unemployment rate is greater than or equal to 4.5% (in line with the SEP forecast), it will prompt a rate cut. If the unemployment rate is at the middle value of 4.4%, the December decision will be a “close call,” and will depend on a broader data flow, including inflation.

 

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