Fed Officials Divided on December Rate Cut Amidst Lost Economic Data

Impact of Government Shutdown on Economic Data

• 📉 The government shutdown has led to the likely permanent loss of crucial October economic reports, including CPI and jobs data.
• ⚠️ This data loss is described as permanently impairing economic information, leaving policymakers at the Federal Reserve effectively "flying blind."

Reduced Likelihood of December Rate Cut

• 📊 Yesterday, the probability of a December rate cut was around 70%, but it has now diminished to approximately 51.7% due to the data void.
• 🗓️ The Federal Open Market Committee (FOMC) will have to make its December decision using data that is already three months old (September data).
• ⚖️ This situation is expected to exacerbate the existing divide among FOMC members regarding interest rate adjustments.

Fed's Dilemma: Inflation vs. Economic Stimulation

• 📈 Analysts and federal authorities are concerned about stagflation, a scenario of high inflation and stagnant job growth.
• 🎯 The September CPI print showed inflation at 3%, which is higher than the Fed's 2% goal, raising concerns that cutting rates could further increase inflation, especially if tariff-driven price hikes are not temporary.
• 📉 Conversely, recent jobs reports show significantly lower hiring numbers compared to the previous year, suggesting a potential need for a rate cut to stimulate the economy.

Risk Assessment and Future Decisions

• 🧩 FOMC members face a difficult decision, weighing the risk of stimulating an economy that could lead to runaway inflation against the risk of not stimulating a potentially slowing economy.
• 🚗 Fed Chair Powell has previously likened the lack of economic data to "driving in the fog," highlighting the danger of making critical decisions without clear information.
• ⏳ The absence of October and November data makes bridging the divide among FOMC members more challenging, leading to a higher probability that opposing viewpoints will remain entrenched.