"Data missing" disrupts interest rate cut plans, Goldman Sachs: Originally it was supposed to "cut rates in December, pause in January," now it's uncertain
The continuous absence of key economic data in the United States forces the market to reassess the Federal Reserve's interest rate cut prospects in December. Current market pricing shows that the probability of a rate cut has fallen below 50%. Goldman Sachs pointed out that the data vacuum severely disrupts the policy path, and its original expectation of a "rate cut in December and a pause in January" faces high uncertainty. At the same time, the downside risks in the labor market are rising, and the widespread adoption of AI technology exacerbates the difficulty of modeling employment and inflation, further amplifying policy complexity
The lack of key economic data is causing the Federal Reserve and the bond market to be in a state of "blind flying," forcing investors to reassess the likelihood of a rate cut in December. Goldman Sachs analysts warn that insufficient data has disrupted the previously expected pace of rate cuts, and the original expectation of "a rate cut in December and a pause in January" now faces great uncertainty.
The market's pricing for a rate cut in December has now fallen below 50%. Although economic data will gradually be released as the U.S. government reopens, investors also face multiple data gaps: the October non-farm payroll report may not be published, the November employment report may not be available before the December FOMC meeting, and inflation data may also be missing. In the absence of data, the U.S. interest rate market is in a wait-and-see mode, with the one-year forward one-year interest rate fluctuating within a narrow range.
This data vacuum directly impacts the market's previous expectations of the policy path. Goldman Sachs originally predicted that the Federal Reserve would implement three "insurance" rate cuts, followed by a pause in January, but the lack of data has made this expectation uncertain. Goldman Sachs pointed out in its research report that, with very little data to support it, the U.S. interest rate market is in a wait-and-see mode.
The downside risks in the U.S. labor market persist, especially as the impact of artificial intelligence on employment, inflation, and neutral interest rates is difficult to assess accurately, further complicating the policy outlook.
Rising Labor Market Risks
Despite the data scarcity, existing indicators show that the labor market is under downward pressure. Challenger's report indicates that the number of layoff announcements in the private sector rose to the highest level outside of recession periods in October.
Goldman Sachs' layoff tracking indicator shows an increase in the number of layoffs in October, currently above pre-pandemic levels. Regression analysis based on the layoff tracking indicator and a series of other indicators shows that the risk of labor market deterioration has recently increased. The probability of an unemployment rate increase of 0.5 percentage points or more in the next six months is 20-25%, whereas six months ago, this probability was only 10%.
AI Impact Increases Policy-Making Difficulty
The widespread use of artificial intelligence adds new complexities to Federal Reserve policy-making. Goldman Sachs analysts state that it is difficult to accurately model the exact impact of AI adoption on inflation, the labor market, and neutral interest rates.
Recent corporate earnings call transcripts show that discussions about layoffs have significantly increased after companies discussed AI technology. This trend has expanded from the tech industry to other sectors, and the impact of AI on the job market may be broader than expected.
Due to the inability to determine the true extent of AI adoption and its effects on various aspects of the economy, the Federal Reserve faces unprecedented challenges in formulating monetary policy. This further exacerbates the uncertainty in policy-making
