Nonfarm payrolls are "gone," next week's U.S. CPI will also be "gone"—can the Fed still "blindly cut rates" in December?
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The U.S. government has fallen into a prolonged shutdown, causing a halt in the release of key economic data. For a Federal Reserve already experiencing its most serious divisions in years, the upcoming December FOMC meeting faces the challenge of making difficult decisions in an information vacuum.
The latest development is that the October CPI, originally scheduled to be released next week, is now in jeopardy. According to Bloomberg, the U.S. Bureau of Labor Statistics has not only delayed the release of the report but has also suspended in-person data collection. The market increasingly believes the Bureau may completely abandon the October CPI release.
Prior to this, two monthly employment reports have already been delayed. The absence of official inflation and labor market data will make internal debates at the Fed about whether to cut rates again in December longer and more complicated.
Although the market still leans toward a December rate cut, the lack of official data may provide policymakers worried about a resurgence of inflation with ample justification to keep rates unchanged next month.
Therefore, in the absence of hard data, investors will turn their attention to next week's public speeches by multiple Fed officials, including John Williams, Raphael Bostic, Stephen Miran, and Alberto Musalem, hoping to glean clues to the policy path.
Data Vacuum Increases Decision-Making Dilemma
For the data-dependent Federal Reserve, the current situation is extremely tricky. Although policymakers had the September CPI data before the last meeting, they were already missing the latest employment report at that time. Now, the successive absence of employment and key inflation data is challenging the foundation of policy-making.
Fed Chair Powell stated after the October rate cut that another cut in December was not a foregone conclusion. For FOMC members focused on the risk of inflation re-acceleration, the absence of official data could further bolster their stance to keep rates unchanged in December.
Even if the government reopens in the coming weeks and statistical work resumes, Fed officials may have to rely on data compiled retrospectively, the accuracy and timeliness of which will be questionable.
BNP Paribas believes that even if some data resumes, the schedule will be significantly delayed.
Alternative Indicators Cannot Solve the “Urgent Problem”
During this official data “blackout” period, the market does not lack all references. Some private sector employment reports are helping fill part of the gap. However, for inflation, government data substitutes are not only harder to obtain but also much more limited in scope.
For example, the Cleveland Fed's "nowcast" model shows that October's year-over-year CPI increase may be similar to the lower-than-expected 3% in September. The core CPI year-over-year rise in September was also 3%.
Nonetheless, these alternative indicators are difficult to fully replace the authority of official reports. Bloomberg Economics analysis points out that even if the government resumes operations in time, the Bureau of Labor Statistics may still find it difficult to collect and process October and November CPI reports before the December FOMC meeting. The economists in this team believe that "October's data could have given the green light for this year's last rate cut." This highlights the decision-making cost brought by missing data.
Shutdown End Timing Becomes Key Variable
Looking ahead, the Fed's final December decision will heavily depend on when the government shutdown ends and how much economic data can catch up to the schedule.
WallstreetCN previously mentioned that Bank of America conducted several scenario analyses, revealing the potential impact of different data restoration progress on policy decisions:
Scenario 1: Access to an "outdated" September employment report. If the government reopens before the end of November, the market may see the September employment report before the December meeting. BofA believes that even if this data is strong, it is unlikely to persuade Powell to pause rate cuts, as it will be considered "outdated."
Scenario 2: Access to both September and October employment reports. If the shutdown ends in early November, allowing the Bureau of Labor Statistics to publish two reports before the December meeting, things become complicated. If the unemployment rate stays at a steady 4.3% and economic activity data is robust enough, a December "rate cut pause" becomes a possible option.
Scenario 3: Access to three complete employment reports. In the best case, if the government quickly ends the shutdown and the Bureau of Labor Statistics can publish the September, October, and November employment reports before the December meeting, BofA proposes a decision rule: If the November unemployment rate is less than or equal to 4.3%, the Fed would keep rates unchanged in December; if it is greater than or equal to 4.5% (consistent with the Fed’s economic forecast), it would prompt a rate cut. If the unemployment rate is at the intermediate 4.4%, the December decision would be a “close call.”
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