Fed Faces a Gamble Ahead of Next Interest Rate Decision (my analysis of the current situation)

The Fed will meet again in December to decide on interest rates. After a cut in October, expectations are that the central bank will proceed cautiously. Fed Chair Jerome Powell has already indicated that further rate cuts are not guaranteed.

With official data lacking, analysts are now turning to figures from companies like ADP and Indeed to gauge the labor market. Meanwhile, the Cleveland Fed is trying to estimate inflation using its own model. According to that model, inflation likely stayed around 3 percent in October, similar to September. However, this remains an estimate and cannot replace official data.

Even if the government shutdown ends quickly, economists warn that the backlogs are significant. Inflation reports for October and November may arrive too late to influence the December rate decision. This means the Fed may have to make its decision without fresh data on the table.

Markets Hanging on Every Word

Investors are closely watching every word from Fed officials. Speeches from influential members, like John Williams of the New York Fed and Raphael Bostic of the Atlanta Fed, are being scrutinized.

Financial markets are still cautiously pricing in a potential rate cut in December, but that probability is fading. Without new data, the Fed may decide to play it safe and leave rates unchanged for now.

Central banks outside the U.S. are also monitoring developments closely. This week, new data and policy statements are expected from Canada, China, the U.K., Japan, and Sweden. But in the U.S., it remains quiet.

The shutdown is not only halting data releases but also making data collection impossible. Even if Washington reopens, economists expect delays and incomplete reports.

As long as the government remains shut, the Fed must navigate without a compass.