Fed in the dark: shutdown blocks data, but rate cut almost certain

Global markets are focused on Washington, as the Federal Open Market Committee is set to meet tomorrow and Wednesday to decide on interest rates. Expectations converge on a new 25-basis-point cut, which would bring the target range for the Fed Funds rate to 3.75–4.00%, following a similar reduction in September.

However, this widely anticipated move comes in an extraordinary context. The federal government shutdown has halted the release of most economic statistics, depriving the central bank of the essential references needed to assess inflation and labor market trends. The Fed thus faces the task of making decisions “in the dark,” with few updated indicators and only a partially readable economic picture.

The only recent data, the September inflation report released belatedly on October 24, shows a smaller-than-expected increase: +0.3% month-on-month and +3.0% year-on-year. However, the suspension of October reports makes it impossible to know whether the slowdown in prices is genuine or merely temporary. According to Bank of America analysts, this week’s rate cut is almost a foregone conclusion, but the outlook beyond December remains uncertain. The Federal Reserve may choose to pause, waiting for data to provide a reliable picture again.

Federal Reserve Chair Jerome Powell, in his customary post-meeting statement, is expected to reiterate that monetary policy will remain data-driven, but is unlikely to provide explicit guidance on further cuts. The approach will likely be marked by caution: the Fed cannot move too quickly nor ignore the remaining inflation risks.

Debate within the Committee is ongoing. Some members, such as Governor Miran, advocate for further rate reductions to support the economy, while the majority of officials close to Powell lean toward a more cautious stance, emphasizing the need to assess the cumulative effects of measures already implemented.

Another topic on the table is the potential end of Quantitative Tightening (QT), the balance-sheet reduction program launched in 2022. Suspending QT could ensure abundant bank reserves and prevent liquidity strains in the markets.

In the markets, October’s cut is already fully priced in, while the likelihood of another move in December remains roughly split. Wall Street continues to benefit from expectations of a more accommodative monetary policy, the dollar remains weak, and Treasury yields hover at subdued levels.

In summary, the Fed is preparing to lower the cost of money again, but it will do so in a context lacking the data necessary to clearly assess the impact of its choices. The real challenge for Powell and his colleagues will be to determine whether this rate cut is just an intermediate step or the end of a loosening cycle—a task made increasingly difficult without up-to-date numbers.

Andrea Pelucchi