Federal Reserve likely to cut rates despite inflation, data blackout

WASHINGTON (TNND) — The Federal Reserve is expected to move forward with another rate cut on Wednesday despite an economic data blackout due to the government shutdown as it tries to keep the labor market from further weakening.

This week’s meeting of the Federal Open Markets Committee, which will end with the rate decision on Wednesday, is widely expected to result in another quarter-point reduction with the central bank trying to keep unemployment from spiking during a time of economic uncertainty.

It comes as the Fed is trying to navigate a delicate balance between its two primary goals of stable prices and maximum employment with forces pulling on both ends of it. On one hand, cutting rates too quickly or too soon could send accelerate inflation, while leaving them at a restrictive level for too long risks further weakening for the employment situation.

“Rising downside risks to employment have shifted our assessment of the balance of risks,” Fed chair Jerome Powell said during a speech earlier this month. “There is no risk-free path for policy as we navigate the tension between our employment and inflation goals.”

Officials are also trying to figure it out in a blackout of government economic data that helps inform their decision-making.

Friday’s inflation report, the only government data to be released since the shutdown started at the beginning of the month, kept the Fed on track to make another cut at this week’s meeting. Inflation rose 3% in September compared to the year prior, the fastest annual pace since January. On a monthly basis, inflation was 0.3% higher.

But the rate of price increases was tamer than economists had feared and wasn’t hot enough to override concerns about a wobbly job market.

“While inflation is still running above the Fed’s 2% target, we expect Fed officials to give more weight to the risks to the labor market in their policy deliberations. In the absence of most government statistics, the Fed has no basis to conclude that the risks to the labor market have changed,” Nancy Vanden Houten, lead U.S. economist at Oxford Economics, wrote in a report.

Markets have already priced in a rate cut and are broadly expecting a 0.25% reduction, bringing the Fed’s benchmark rate down to a range of 3.75% to 4%.

Even with inflation still running above target, Fed officials have determined the risks of further deterioration in the labor market should take priority in their monetary policy. Expansive tariffs from the Trump administration have not brought huge increases to prices like initially feared and Fed officials have mostly reached a consensus that any hikes will be a one-time issue and not a persistent problem.

Figuring out what’s happening in the labor market is a challenging task with the government shutdown lingering toward a second month, reducing the amount of information available to officials trying to calibrate policy. Instead of the gold standard government data, the Fed and economists have had to turn to private measures like the ADP employment report and corporate earnings to gauge the strength of the economy.

Officials have already lost the release of one jobs report and appear unlikely to get the November release on time, adding to the challenge of trying to keep the economy on track. Private measures of employment have shown a similar outlook to the government data being released prior to the shutdown — low levels of job creation and businesses pulling back on hiring. The unemployment rate is historically strong, but Fed officials are carefully monitoring for signs of increased layoffs.

Markets will also be watching how Powell signals the Fed’s path forward after the meeting. Investors are betting on another quarter-point cut at the conclusion of the December meeting, according to the CME FedWatch tool. But forecasting the path forward gets more difficult in the absence of current data that clouds the outlook of the economy.

“October’s expected rate cut is the easy call. But as the government shutdown drags on and key economic data remains unavailable, forecasting the conditions of the economy will become increasingly difficult heading into December’s meeting and the release of a new Summary of Economic Projections,” said Bankrate financial analyst Stephen Kates.