Fed expected to cut rates again, even as officials fly blind without data

The Federal Reserve convenes its policy meeting this week as the government shutdown verges on nearly a month, leaving central bankers without most official data to make a decision on setting interest rates.

Even so, officials are expected to trim their benchmark interest rate by a quarter percentage point for the second time this year.

“In the absence of the official data for jobs, they’re going to lean on other sources of information, which at this point aren’t really going to contradict what they have argued as their reason for cutting,” former Kansas City Federal Reserve president Esther George said in an interview.

Fed officials have been flying blind as the government shutdown, which began Oct. 1, precluded the release of the jobs report for September, arguably the most important data needed to decide the future path of monetary policy.

Read more: What the Fed rate decision means for bank accounts, credit cards, and loans

Meanwhile, private-sector data and anecdotal surveys suggest the job market has deteriorated. Payroll processor ADP reported that private payroll employment fell by 32,000 in September, while the Fed’s Beige Book, a compilation of anecdotal evidence from across the country, also painted a weaker picture of the job market.

Wilmington Trust chief economist Luke Tilley notes the average of ADP and workforce intelligence firm Revelio Labs showed job growth of just 13,000 for the month of September.

Looking at job data from the BLS from May through August — with September’s suspended on account of the government shutdown — Tilley says total private sector job growth has totaled 157,000 for that four-month period. Healthcare added 249,000 jobs during that time, but all the other private sectors together including manufacturing, construction, retail, information, professional business services, and leisure hospitality, were negative 92,000 jobs.

Tilley believes that the slowdown in the job market is due more to softening demand for workers than to lower immigration due to Trump administration policies that have led to a smaller supply of workers. He doesn’t expect job growth to reaccelerate.

“The job market is a lagging indicator, and there’s a risk that’s going to keep going down and that we’ve already turned in the economy,” said Tilley.

One important piece of data the Fed did get was the Consumer Price Index, which showed inflation cooled slightly in September. On a core basis, which excludes volatile food and energy prices and is the preferred Fed measure, inflation rose by 3%, cooling from 3.1% in the prior month. Month over month, core inflation rose 0.2% after rising 0.3% in the two preceding months.

The Bureau of Labor Statistics released the government measure of inflation on Oct. 24, despite the government shutdown. The data is required by law to be used to calculate annual cost-of-living increases for Social Security payments before Nov. 1. It was delayed from the initially slated release date of Oct. 15.

“The Fed right now is in a tough spot. It looks like stagflation — not the 1970s, but it really feels like stagflation,” said Patrick Harker, former president of the Philadelphia Fed and Rowan Distinguished Professor at the Wharton School of the University of Pennsylvania.

“The labor market is clearly softening. Even though we’re not going to get that official data, all the other data that shows that it’s softening. It’s not falling off a cliff yet, but it’s softening and inflation remains stuck.”

Harker doesn’t see inflation easing soon as tariffs drip into the economy and retailers that have been holding back on price increases begin to raise them.

That said, he agrees with the prevailing expectation that the Fed will cut rates by 25 basis points this week.

Read more: What is stagflation, and how does it impact you?

‘Lean in the direction of risk management’

Bond portfolio manager for Wilmington Trust, Wil Stith, says the Fed will look at the inflation data “gingerly,” noting that the new numbers align with the theme of the cut from last meeting, when officials shifted focus to shoring up the job market and away from what they expect to be a one-time increase in prices from tariffs.

“When you look at one risk versus the other risk to their mandate, I think they cut again at this week’s meeting,” said Stith.

But George said she thinks the Fed needs to be “very cognizant” of the inflation numbers and constantly reassess the data and where risks lie.

“They want to lean in the direction of risk management around the labor market,” said George. “But if that labor market holds at a pretty low unemployment rate … and you see inflation is continuing to run above your target, I think you have a different decision to make at some point.”

George believes the Fed is overly confident that inflation from tariffs will have a one-time impact on prices and noted that inflation was an issue before tariffs kicked in. In theory, she said, the textbook case suggests tariffs will lead to one-time price adjustments that don’t necessarily translate to inflation. In reality, she said, it’s not that clear-cut, as only part of inflation may be related to tariffs. She said that there are components of inflation that remain high that aren’t necessarily affected by tariffs.

“That’s what I’d keep an eye out on, particularly when you had not achieved your inflation target ahead of [tariffs] coming on,” said George.

At the same time, the Fed has to contend with risks of recent losses on loans taken by regional and large banks and whether they have implications for the financial system and the economic outlook.

Delinquencies on subprime auto loans have raised flags about whether lenders weren’t following good loan underwriting standards and whether there are other loan risks. Zions Bancorp disclosed a couple of weeks ago that it would take a $50 million loss on two commercial and industrial loans from its California division. The collapse of auto-parts maker First Brands and Dallas-based subprime auto lender Tricolor have been linked to allegations of auto loan fraud, which has affected multiple banks, including JPMorgan Chase.

Tilley doesn’t think the loan losses on subprime auto loans are the early etchings of a financial crisis, but he takes them as a sign the economy is slowing or may be at a turning point.

“When there’s a slowdown in the economy, slowdown in job growth, fewer people are going to be making payments,” said Tilley. “Bad underwriting and even fraud doesn’t cause that many problems as long as everybody’s paying and the economy is doing well.”

Harker also sees the delinquencies as a warning sign for the economy, noting subprime borrowers are the ones being stretched by inflation.

“It’s typical of a cycle that credit standards get loosened some and then things get tough and some people stretch too far, some banks stretch too far,” he said.

Harker says he thinks the chances for a recession are low right now, but that the economy is slowing down.

What the Fed has said

Fed Chair Jerome Powell signaled about two weeks ago that another rate cut was possible, even as he noted monetary policy will be set meeting by meeting. Absent government data, Powell said that based on the data the Fed does have, “the downside risks to employment appear to have risen” and shifted policymakers’ assessment of the balance of risks.

Policymakers on the Fed’s 19-member Federal Open Market Committee have penciled in a median estimate of two more rate cuts for this year. Markets have priced in virtual certainty that the Fed will cut rates this week and again in December, even as Powell has cautioned that interest rate projections are subject to change as officials get new data. Fed governor Chris Waller also said after this meeting, the Fed should take a cautious approach to cutting rates further pending data.

Stith says a cut in December is less of a sure thing than this week’s expected cut, stressing that it will depend on what the data shows when it’s finally released.

Harker thinks one more rate cut is enough for this year and that the Fed doesn’t need to make a third cut in December given inflation. However, he still expects the central bank to cut again in December.

While George says a lot can happen in between Fed meetings — a six-week time frame — she still thinks there’s a good chance the Fed will cut again come December.

“I think unless the data has a sharp reversal one way or the other — it gets worse or it gets better — I think they’re going to have to presume that the state of the world that caused them to cut is still in play,” she said. “But a lot can happen in the six-week time frame here.”

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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