Key Takeaways:

• Widespread expectation of a 25 basis point rate cut.
• Government shutdown hindering access to key economic data.
• Concerns about labor market resilience influencing rate decisions.
• Focus on Powell's statements and dissenting members' views.
• Uncertainty surrounding future monetary policy due to data gaps.

The spotlight is on the upcoming Federal Reserve (Fed) decision, with markets widely anticipating a 25 basis point cut to the benchmark interest rate, bringing it to a range of 3.75%-4.00%. This expected move comes amid the partial shutdown of the US federal government, now in its 29th day, which has led to a scarcity of essential economic data, further complicating the decision-making process for monetary policymakers.

A Reuters survey revealed near-unanimous consensus among economists that the Fed would implement the rate cut. However, the decision is viewed, in part, as driven by policy inertia rather than solely by the 'data-driven' principle often emphasized by central bank officials.

Due to the government shutdown, the Bureau of Labor Statistics was unable to release the September non-farm payrolls report – a crucial indicator for assessing labor market vitality amid the Trump administration's immigration policies. As of August (the last report before the October 1st shutdown), the US unemployment rate had edged up slightly from 4.0% in January to 4.3%, accompanied by a noticeable slowdown in hiring. A decrease in the number of foreign job seekers has somewhat limited the sharp rise in the unemployment rate.

Despite Fed officials believing that labor market supply and demand remain generally balanced, concerns about economic growth prospects have made them wary of potential company reductions in hiring or layoffs. Amazon's recent announcement of layoff plans and the rise in state unemployment claims highlight this risk. State employment agencies continue to collect and publish weekly unemployment claims data, making it one of the few available indicators for measuring labor market health.

Regarding inflation, the September Consumer Price Index (CPI) report, released at the direction of the White House, showed inflation below expectations. Gasoline price increases and rising costs of imported goods due to tariffs did not significantly push inflation higher, offset by weakness in housing inflation.

Notably, this report was the only official inflation data allowed to be published during the government shutdown, due to its connection with Social Security benefit adjustment calculations. The White House has clarified that the October CPI report may not be published on time due to disruptions in data collection, marking a historical first.

Steven Englander, Head of North America Macro Strategy at Standard Chartered Bank, points out that the combination of relatively positive inflation data and continued pressure on the labor market means that since the Fed signaled in September a potential rate cut of 25 basis points at the October and December meetings, "there is not enough basis for policy stance adjustment."

The policy statement and interest rate decision will be released at 2 PM ET on Thursday, with Fed Chairman Jerome Powell holding a press conference half an hour later. As the Fed will not be updating economic forecasts at this meeting, Powell's statements will be the foundation upon which markets interpret economic prospects and the policy path.

Policy Dissension and 'Balance Sheet Reduction' Controversy

Financial markets will focus on dissenting voices in the interest rate decision and policy statement, and whether an end to the balance sheet reduction plan will be announced concurrently.

Englander predicts that Michelle Bowman, a Fed governor on leave at the White House as an economic advisor, may vote against a rate cut for the second consecutive time, advocating for a larger cut of 50 basis points. While some officials concerned about the path of inflation may be inclined to maintain current interest rate levels.

Additionally, Fed Vice Chair for Supervision, Barbara Bowman, may oppose halting balance sheet reduction under current asset holdings of around $6.6 trillion, due to her support for minimizing central bank intervention in financial markets.

These disagreements and Powell's assessments of the economic situation are subject to difficulties in official data release. With the government shutdown continuing, key data like the October non-farm payrolls report and Q3 GDP have been delayed. Even if an agreement is reached to restart the government soon, the Fed will have only about six weeks to wait for the delayed data before its final annual meeting in December.

Policy Uncertainty in the 'Data Fog'

Although Fed officials indicated that they could fill some data gaps through local surveys with senior corporate executives, the unique nature of official inflation statistics still creates a crucial gap in policymaking. The delay in publishing GDP and consumer spending data also makes it difficult to clarify the contradiction between robust economic activity and slowing hiring. Officials previously believed this dichotomy would soon evolve in one direction: either 'continued growth and recovery in hiring' or a 'full slowdown,' but the current data shortage makes it harder to predict this turning point.

Ryan Sweet, Chief US Economist at Oxford Economics, points out that "the government shutdown leaves the Fed puzzled about labor market conditions, leading it to lean towards cutting interest rates again, rather than risking being late to act, which could lead to the need for greater easing in the future."

He emphasizes that the longer the shutdown lasts, the more officials rely on secondary data sources, and the more subjective policy decisions become. Recent surveys on business and consumer confidence suggest that optimism is beginning to decline, a trend that may further influence policy decisions. Sweet predicts that "subjectivity will continue to influence policy decisions in December, and the longer the government shutdown lasts, the higher the probability of another rate cut."

This interest rate cut decision is not just a response to current economic pressures, but also highlights the unexpected impact of political gridlock on the independence of monetary policy. In the 'fog' of data absence, Powell's statements at the press conference and dissenting votes among officials will be the key indicators upon which markets rely to assess the future path of Fed policy.