Investors are split on whether the Federal Reserve will cut interest rates again at its next meeting in less than a month, amid uncertainty following the loss of economic data during the government shutdown.
Typically, investors and Fed watchers generally have a sense of what the central bank plans to do with interest rates at its next meeting of the Monetary Policy Committee. But now, there appears to be a growing split between the hawks and the doves on the board about monetary policy, in part, because officials are missing key economic data on inflation and the labor market.
“The U.S. economy is in a fog, and the Fed is choosing to pause, to wait and see, to wait out the fog,” Heather Long, chief economist at Navy Federal Credit Union, told the Washington Examiner.
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With just 25 days to go until the meeting, investors are pegging the odds of a December rate cut at 46%, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed. They see just over even odds that the Fed will hold steady.
A week ago, the odds of a rate cut were implied to be 67%, marking a significant departure from a month ago, when investors were estimating nearly a 95% chance of a cut.
And while the lack of solid economic data is undoubtedly contributing to the uncertainty surrounding interest rates, Dennis Lockhart, former president of the Federal Reserve Bank of Atlanta, told the Washington Examiner that the committee appeared split even before the shutdown began in October.
He said that there is a “tension” between the hawks, who prefer tighter monetary policy, and the doves, who are typically more open to rate cuts, on the board. That is because the Fed is attempting to balance its dual mandate — price stability and maximum employment. Inflation remains too high, but there are recent signs that the labor market is softening meaningfully.
There are still concerns on the FOMC board about inflation. It is still running slightly above the Fed’s preferred 2% level, according to the latest available data, but concerns also exist that the labor market is weakening. At the same time, inflation isn’t spiraling, and the jobs market is still stable. So, which side of the mandate to prioritize is a central tension.
“Inflation isn’t out of control and the employment situation is not tanking, but they’re having to basically prioritize one or the other, and that’s the question on which the committee is split,” Lockhart said.
Fed Chairman Jerome Powell has also worked to tamp down investor expectations that a December interest rate cut is a sure thing.
At the FOMC’s last meeting, which came at the end of October, just a few days before the shutdown, Powell poured cold water on the idea that a December rate cut is baked in. That caused stocks to sink at the time.
“A further reduction in the policy rate at the December meeting is not a foregone conclusion,” Powell said.
The chairman said there was no consensus among the 19 people who participated in the monetary policy committee meeting about what should be done with interest rates at the Fed’s next meeting in December.
“There were strongly differing views today, and the takeaway from that is we haven’t made a decision about December,” he said.
At the last meeting, Fed governor Stephen Miran, who was recently nominated by Trump and confirmed by the Senate, dissented on the rate decision. He preferred a larger half percentage point cut. Jeffrey Schmid, the president of the Federal Reserve Bank of Kansas City, also dissented, but he favored no cut at all.
And while the tension between the hawks and the doves clearly existed before the shutdown, it has been exacerbated by the lack of federal economic data, which is critical to determining which side of the mandate should be prioritized at the December meeting.
“Certainly, the lack of data in the last few weeks has contributed to caution on the part of the committee,” Lockhart said.
Specifically, the employment reports for September and October were never released because Bureau of Labor Statistics employees were furloughed through Wednesday. The Job Openings and Labor Turnover report for September was also missed.
On the inflation front, the producer price index reports for September and October were never released. The consumer price index report for September was released, but the CPI report for October is delayed.
It’s an open question when most of those reports will be released, although the BLS announced on Friday that the September employment report will be released on Nov. 20.
Long said that another factor driving the divide among investors is that some of the more dovish members of the FOMC who supported the September and October interest rate cuts have recently sounded “very waffly” on what to expect at the next meeting.
She said that there will likely be more of a convergence on what might happen at the Fed’s December meeting as more shutdown-delayed data starts to filter through.
“If the September jobs report is terrible, then I think the pressure ramps up again for a December rate cut,” Long said.
But conversely, if the September jobs report shows a continuation of the “low fire, low hire” trend, Powell could reasonably come out and justify a short pause in cutting rates, Long added.
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Still, even with more economic data, there might still be split opinions among some on the FOMC about what to do in December — and it could come down to Powell.
“In my experience there at the Fed, when it’s a jump ball, the chair — providing the chair is highly respected — the chair usually will get the benefit of the doubt on the policy decision,” Lockhart said.