Non-farm "is gone," next week's US CPI will also be "gone," can the Federal Reserve "close its eyes and cut interest rates" in December?

The U.S. government is caught in a prolonged shutdown, and the release of key economic data has come to a standstill. For the Federal Reserve, which is already in one of its most severe states of division in recent years, the upcoming December meeting faces the dilemma of making difficult decisions in an information vacuum.

The latest development is that the October CPI, originally scheduled for release next week, is also in jeopardy. According to Bloomberg, the U.S. Bureau of Labor Statistics has not only postponed the release of the report but has even suspended the collection of offline data. The market increasingly believes that the Bureau is likely to completely abandon the release of the October CPI report.

Prior to this, two monthly employment reports had already been delayed. The absence of official inflation and employment market data will make the internal debate within the Federal Reserve about whether to cut rates again in December longer and more complex.

Although the market still leans towards a rate cut in December, the lack of official data may provide policymakers, who are concerned about a resurgence of inflation, with a sufficient reason to maintain interest rates next month.

Therefore, in the absence of hard data, investors will turn their attention to the public speeches of several Federal Reserve officials next week, including John Williams, Raphael Bostic, Stephen Miran, and Alberto Musalem, in hopes of finding clues about the policy path.

Data Vacuum Intensifies Decision-Making Dilemma

For the Federal Reserve, which relies on data for decision-making, the current situation is extremely tricky. Although policymakers received the September CPI data before the last meeting, they were already missing the latest employment report at that time. Now, the consecutive absence of employment reports and key inflation data is challenging the foundation of policy-making.

Federal Reserve Chairman Jerome Powell stated after the rate cut in October that a rate cut in December is not a foregone conclusion. For those FOMC members focused on the risk of inflation potentially accelerating again, the absence of official data may further strengthen their position to maintain interest rates in December.

Even if the government reopens in the coming weeks and statistical work resumes, Federal Reserve officials may face data compiled through retrospective surveys, which will raise questions about their accuracy and timeliness.

BNP Paribas believes that even if some data is restored, the schedule will be severely delayed.

Alternative Indicators Fail to Address Urgent Needs

During the "black box" period of official data, the market is not completely without references. Some private sector employment market reports are helping to fill some gaps. However, in terms of inflation, alternatives to government data are not only harder to obtain but also have a more limited scope.

For example, the Cleveland Fed's "nowcast" model indicates that the year-on-year increase in the October CPI may be similar to September's lower-than-expected 3%. The year-on-year increase in the core CPI for September was also 3%.

Nevertheless, these alternative indicators cannot fully replace the authority of official reports. Analysis from Bloomberg Economics points out that if the government can resume operations in a timely manner, the Bureau of Labor Statistics will still find it difficult to collect and process the October and November CPI reports before the December FOMC meeting. The economists in the team believe that "the data for October could have given the green light for a rate cut at the last meeting of the year." "This highlights the decision-making costs brought about by data absence.

The End of the Shutdown Becomes a Key Variable

Looking ahead, 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.

Wall Street Insight previously mentioned that Bank of America conducted several scenario simulations, revealing the potential impact of different data recovery progress on policy decisions:

Scenario 1: Receiving an "outdated" September employment report. If the government reopens before the end of November, the market may see the September employment report before the December meeting. Bank of America believes that even if this data is strong, it is unlikely to persuade Powell to pause interest rate cuts, as it will be viewed as "outdated."

Scenario 2: Receiving employment reports for September and October. If the shutdown can end in early November, allowing the Bureau of Labor Statistics to release two reports before the December meeting, the situation becomes more complex. If the unemployment rate remains steady at 4.3% and economic activity data is robust enough, then a "pause in interest rate cuts" in December will become a possible option.

Scenario 3: Receiving three complete employment reports. In the best-case scenario, if the government quickly ends the shutdown, the Bureau of Labor Statistics can release the September, October, and November employment reports before the December meeting. Bank of America proposed a decision-making rule of thumb: if the November unemployment rate is less than or equal to 4.3%, it will lead the Federal Reserve to maintain interest rates in December; while an unemployment rate of 4.5% or higher (consistent with the Federal Reserve's economic forecast summary) 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."