Missing Data Unlikely to Deter Fed from Rate-Cut Path

The Federal Reserve is set to implement its second short-term rate cut of the year amidst an uncertain economic landscape. The impending government shutdown has interrupted vital data collection, which the Fed uses to monitor employment, inflation, and overall economic conditions.

Rate Cuts Amid Data Drought

Though the Fed aims to stimulate economic growth and hiring through lower rates, the recent data hiatus poses significant risks. Key reports such as September’s jobs figures, initially due three weeks ago, are postponed. Additionally, the White House indicated that October’s inflation report might not be released at all.

Expected Rate Cuts

Financial markets anticipate that the Fed will cut rates during its upcoming meetings in October and December. Currently, the key interest rate stands at approximately 4.1%. Many officials believe this rate is too high and is restraining economic growth.

• Monthly hiring gains have averaged just 29,000 for the past three months.
• The unemployment rate increased slightly to 4.3% in August, up from 4.2% in July.

Private Sector Data as a Backup

With government reports delayed, the Fed is looking to private sector data. A report from payroll processor ADP indicates that businesses have begun to add jobs again after earlier losses. This change could impact the Fed’s decision on future rate cuts.

Federal Reserve’s Balance Sheet Strategy

On Wednesday, the Fed may also announce a halt in the reduction of its extensive securities holdings. Since 2020, the Fed has purchased nearly $5 trillion in Treasury securities and mortgage-backed bonds to stabilize markets. Currently, its holdings amount to about $6.6 trillion.

• The Fed is reducing its mortgage-backed securities by up to $35 billion monthly.
• Treasury holdings are being cut down by $5 billion each month.

Historically, the Fed’s balance sheet reduction faced challenges. In 2019, similar actions led to unexpected spikes in short-term rates, causing market disruptions. The Fed is cautious about repeating that scenario and is closely monitoring bank reserves.

Future Outlook

The announcement regarding potential changes to the Fed’s balance sheet and interest rates will be closely watched. Definitions of economic health, not only depend on government data but also on broader economic signals. As the situation evolves, the Fed’s strategy will likely adapt accordingly.