The Fed's Rate Cut Plans: Navigating Uncertainty

The Federal Reserve is likely to lower interest rates this week, despite a lack of recent data. The government shutdown has delayed key reports on jobs and inflation, leaving the Fed to make significant decisions with incomplete information.

Rate Cuts Hinged on Incomplete Data

The Fed has hinted at rate cuts in October and December. However, if job numbers suddenly improve, these cuts might not be necessary. Private data from ADP indicates that hiring picked up in late September, suggesting the economy may be stronger than anticipated.

Economic Indicators: A Mixed Picture

• Job Gains: Before the shutdown, job gains were weak, averaging just 29,000 a month.
• Unemployment: Still low, at 4.3%.
• Inflation: High but not worsening.

The Fed is relying on alternative data sources to fill the gaps left by the delayed reports.

Fed's Bond Holdings: A Delicate Balance

The Fed may also halt the reduction of its massive bond holdings, which could slightly lower long-term interest rates, such as those for mortgages. The Fed bought these bonds during the pandemic to keep rates low and has been slowly selling them off since.

Avoiding Past Mistakes

In 2019, the Fed's bond sales caused a sudden spike in short-term rates. To prevent a repeat, the Fed is proceeding cautiously to avoid market disruptions.