Introduction to the Federal Reserve’s Rate Cut
The Federal Reserve is expected to cut its short-term rate for the second time this year, despite the increasingly cloudy view of the economy. This decision comes as the government shutdown has cut off the flow of data that the Fed relies on to track employment, inflation, and the broader economy.
Impact of the Government Shutdown
The government shutdown has resulted in a data drought, with September’s jobs report still postponed and this month’s hiring figures likely to be delayed. The White House has also stated that October’s inflation report may never be issued at all. This lack of data raises risks for the Fed, as it is widely expected to keep cutting rates in an effort to shore up growth and hiring.
Fed’s Decision-Making Process
Fed officials signaled at their last meeting in September that they would likely implement rate reductions in October and December. Financial markets now consider a cut in December to be a near-certainty. However, should job gains pick up soon, the Fed may not detect the change, and further rate cuts may not be justified.
Alternative Data Sources
On Tuesday, payroll processor ADP released a new weekly measure of hiring by businesses, using payroll data from millions of clients. The data shows that companies resumed adding jobs in late September and earlier this month, after shedding workers in July and August. This alternative data source provides some insight into the current state of the economy, but the Fed’s decision-making process is still hindered by the lack of official data.
Economic Indicators
Before the government shutdown, monthly hiring gains had weakened to an average of just 29,000 a month for the previous three months, according to the Labor Department’s data. The unemployment rate ticked up to a still-low 4.3% in August from 4.2% in July. Last week’s inflation report showed that inflation remains elevated but isn’t accelerating and may not need higher interest rates to tame it.
Fed’s Securities Holdings
The Fed may also announce that it will no longer reduce the size of its massive securities holdings, which it accumulated during and after the pandemic and the 2008-2009 Great Recession. The change could over time slightly reduce longer-term interest rates on things like mortgages but aren’t likely to have a major impact on consumer borrowing costs.
Conclusion
In conclusion, the Federal Reserve’s decision to cut its short-term rate comes with risks due to the lack of data caused by the government shutdown. The Fed’s ability to make informed decisions is hindered, and alternative data sources may not provide a complete picture of the economy. Despite these challenges, the Fed is expected to continue cutting rates in an effort to support economic growth and hiring. As the economy continues to evolve, it is essential to monitor the Fed’s actions and their impact on the economy.
