If there is no data by December, the Federal Reserve can only "blindly cut interest rates"?

The ongoing government shutdown is pushing the Federal Reserve into an exceptionally difficult situation. If key employment and inflation data remain missing before the December policy meeting, policymakers may be forced to make critical interest rate decisions in an information "vacuum," significantly increasing the likelihood of them "blindly cutting rates" based on an established dovish path.

According to news from the Chase trading desk, a report released by Bank of America on October 28 indicates that the scenario of the Federal Reserve being "in the dark" during the December meeting is becoming increasingly realistic. The report points out that not only is there no progress on ending the government shutdown, but even if the government reopens, it may take months for data flows to return to normal.

This lack of data exacerbates the existing divisions within the FOMC. A dovish camp, possibly including Chairman Powell, may insist on the rate-cutting path hinted at in the September dot plot. However, hawkish members of the committee are likely to oppose a third rate cut this year in the absence of new evidence of economic weakness.

For investors, this unprecedented uncertainty significantly raises the risks surrounding the December meeting. The final policy decision may no longer depend on the latest economic indicators but rather rely more on a divided committee weighing old expectations against new risks, which could lead to a situation where both hawks and doves cast opposing votes, introducing greater variability into market expectations.

Data Shortages May Intensify Internal Divisions

Bank of America's analysis suggests that the September FOMC meeting revealed profound divisions among decision-makers regarding the assessment of downside risks in the labor market. At that time, a slim majority believed these risks were sufficient to support at least a 75 basis point rate cut this year.

In the absence of new data, this dovish group is likely to push for the realization of the expectations set in the September dot plot. The report states that some dovish members may even argue that the prolonged government shutdown itself amplifies the downside risks to economic activity, thus providing another reason to support a rate cut.

However, the hawkish forces within the committee cannot be ignored. The September dot plot indicated that seven FOMC participants supported only one rate cut this year. Bank of America believes this camp includes four voting members: Barr, Goolsbee, Musalem, and Schmid. While they are not expected to raise objections to a rate cut at this week's meeting, pushing for a third rate cut in December may be "too much" for them, especially given the stability in unemployment claims reported at the state level. This increases the risk of at least one hawkish dissenting vote at the December meeting, and dovish member Miran may also cast a dissenting vote.

Timing of Data Recovery Determines Policy Path

The Federal Reserve's final decision in December will heavily depend on when the government shutdown ends and to what extent economic data can catch up with the schedule. Bank of America has conducted several scenario analyses.

• Scenario One: An "outdated" September employment report is obtained before the end of November. If the government reopens before the end of November, the market should be able to see the September employment report before the December meeting. The report suggests that weak data would reduce the risk of a hawkish dissenting vote, but even if the data is strong, it is unlikely to persuade Powell to pause rate cuts, as this report would be viewed as "outdated."
• Scenario 2: Receiving two employment reports for September and October in early November. If the shutdown can end in early November, allowing the Bureau of Labor Statistics (BLS) to release two reports before the December meeting, the situation will become more complex. In this case, if the unemployment rate remains steady at 4.3% and the economic activity data for September and October is robust enough, then a "pause in rate cuts" in December will become a possible option.
• Scenario 3: Data fully catches up, receiving three employment reports. The ideal situation is for the government to quickly end the shutdown, allowing the Bureau of Labor Statistics to conduct surveys for both October and November simultaneously, thus releasing all three employment reports for September, October, and November before the December meeting. In this case, Bank of America proposed a decision-making rule of thumb: if the November unemployment rate is less than or equal to 4.3%, the Federal Reserve will maintain interest rates in December; whereas if the unemployment rate is greater than or equal to 4.5% (consistent with the Federal Reserve's Summary of Economic Projections SEP), it will prompt a rate cut. If the unemployment rate falls in the middle ground of 4.4%, the December decision will be a "close call" and will depend on a broader flow of data, including inflation