Fed Prepared for Rate Cuts Amid Concerns Over US Data Void

The Federal Reserve prepares for potential interest rate cuts amid growing concerns over a lack of reliable economic data. This uncertainty arises from a U.S. government shutdown that began on October 1, suspending the release of critical employment information.

Impact of the Government Shutdown on Economic Data

Since the start of the shutdown, official job growth statistics have not been updated. According to available reports, job growth remains weak, averaging just 29,000 new jobs monthly from June to August, significantly below pre-pandemic levels. This situation leaves Fed officials without essential data to make informed decisions.

Market Expectations and Pressure on the Fed

Financial markets forecast the Fed will lower its benchmark interest rate by 25 basis points, bringing it to a range between 3.75% and 4.00% during the upcoming policy meeting on October 28-29. However, the lack of government data has policymakers feeling uncertain, as expressed by David Seif from Nomura.

Inflation and Economic Growth Considerations

While there are indications of weaker job growth, other economic factors remain in focus. Recent business surveys indicate potential price increases, with inflation consistently above the Fed’s 2% target. Economists anticipate a year-over-year increase in the Consumer Price Index (CPI) at about 3.1% for September, reflecting ongoing inflation pressures.

• The Fed’s Personal Consumption Expenditures Price Index (PCE) has risen to 2.7% in August from a low of 2.3% in April.
• Fed officials expect PCE to conclude the year at approximately 3.0%.

Fed Officials’ Divergent Views on Rate Cuts

Diversified opinions exist among Fed officials regarding interest rates and inflation. Kansas City Fed President Jeffrey Schmid advocates for maintaining the current high rate to control inflation, while new Fed Governor Stephen Miran argues for lower interest rates due to anticipated inflation drops.

The Challenge of Monitoring Economic Indicators

The ongoing data blackout complicates the Fed’s ability to assess the job market accurately. Although state unemployment claims and private payroll reports provide some insights, tracking inflation lacks similar alternatives. Private surveys, such as credit card transaction databases, cannot replace the comprehensive nature of government data.

Conclusion: Outlook Amid Uncertainty

With limited insights, Fed officials face a challenging landscape. Job growth appears weak, yet economic indicators suggest potential growth. As Minneapolis Fed President Neel Kashkari noted, the length of the shutdown will significantly impact the Fed’s understanding of the economy.