If there's still no data by December, will the Fed have no choice but to "blindly cut rates"?
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If there's still no data by December, will the Fed have no choice but to "blindly cut rates"?
The U.S. government shutdown has left the Federal Reserve in a "data vacuum," potentially forcing it to make its December interest rate decision without critical employment and inflation data.
Navigating Web3 tides with focused insightsAuthor: Zhang Yaqi
Source: Wall Street Insights
The U.S. government's ongoing shutdown is pushing the Federal Reserve into an exceptionally difficult position. If key employment and inflation data remain missing ahead of the December monetary policy meeting, policymakers may be forced to make critical interest rate decisions in an information "vacuum," significantly increasing the likelihood that they will proceed with rate cuts along a predetermined dovish path—essentially "blindly cutting rates."
According to Fengwind Trading Desk, based on a report issued by Bank of America on October 28, the scenario of the Fed going into its December meeting "in the dark" is becoming increasingly realistic. The report notes that not only is there no progress toward ending the government shutdown, but even if the government reopens, it could take months for data flows to return to normal.
This data shortfall intensifies the existing divisions within the FOMC. A dovish faction, possibly including Chair Powell, may stick to the rate-cutting path implied in the September rate "dot plot." However, hawkish members of the committee are likely to oppose a third rate cut this year in the absence of new evidence showing economic weakness.
For investors, this unprecedented uncertainty sharply increases the risks surrounding the December meeting. The final policy decision may no longer depend on the latest economic indicators, but rather hinge more on how a divided committee balances old expectations against new risks—potentially resulting in both dovish and hawkish members casting dissenting votes, thereby creating greater uncertainty for market expectations.
Data Gaps Could Widen Internal Divisions
Bank of America's analysis suggests that the September FOMC meeting already revealed deep disagreements among policymakers over assessing downside risks in the labor market. At that time, a narrow majority believed those risks justified at least a 75-basis-point rate cut by year-end.
In the absence of new data, this dovish group is likely to push for fulfilling the expectations set out in the September dot plot. The report states that some dovish members might even argue that a prolonged government shutdown itself amplifies downside risks to economic activity, providing yet another rationale for rate cuts.
However, the hawkish contingent on the committee cannot be ignored. 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, Masmula, and Schmid. While they are not expected to object to a rate cut at this week’s meeting, pushing for a third cut in December might be “too much” for them, especially given that state-level unemployment claims data have remained range-bound. This increases the risk of at least one hawkish dissenting vote at the December meeting, while dovish member Miran might also cast a dissenting vote.
Data Recovery Timeline Will Shape Policy Path
The Fed’s final decision in December will heavily depend on when the government shutdown ends and how quickly economic data can catch up with the schedule. Bank of America has modeled several scenarios.
Scenario One: Receiving an “outdated” September jobs report by end-November. If the government reopens by the end of November, markets should see the September employment report before the December meeting. The report argues that weak data would reduce the risk of hawkish dissent, but even strong numbers are unlikely to convince Powell to pause rate cuts, as the report would be viewed as “outdated.”
Scenario Two: Receiving both September and October jobs reports in early November. If the shutdown ends in early November, allowing the Bureau of Labor Statistics (BLS) 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 from September to October appears sufficiently robust, then a “pause on rate cuts” in December becomes a possible option.
Scenario Three: Full data recovery with three jobs reports. The most favorable scenario is a swift end to the shutdown, enabling the BLS to conduct both October and November surveys simultaneously, thus releasing all three reports—September, October, and November—before the December meeting. In this case, Bank of America proposes a rule of thumb: an unemployment rate in November at or below 4.3% would lead the Fed to hold rates steady in December; a rate at or above 4.5% (consistent with the Fed’s Summary of Economic Projections, SEP) would prompt another rate cut. If the unemployment rate falls in the middle ground of 4.4%, the December decision would be a “toss-up,” depending on a broader set of data, including inflation.
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