If there is still no data by December, will the Federal Reserve have to "cut rates blindly"?

The U.S. government shutdown has plunged the Federal Reserve into a "data vacuum," potentially forcing it to make its December rate decision without access to key employment and inflation information. Bank of America warns that this will intensify the hawk-dove divide within the FOMC. Doves may stick to the established rate-cut path, while hawks could oppose it due to a lack of new evidence of economic weakness.

Written by: Zhang Yaqi

Source: Wallstreetcn

The ongoing U.S. government shutdown is pushing the Federal Reserve into an unusually difficult position. If key employment and inflation data remain missing before the December FOMC meeting, policymakers may be forced to make a crucial rate decision in an information "vacuum," greatly increasing the likelihood that they will "blindly" follow the established dovish path to cut rates.

According to Trading Desk, a report released by Bank of America on October 28 indicates that the scenario of the Federal Reserve going into the December meeting "completely in the dark" is becoming increasingly realistic. The report points out that not only is there no progress on ending the government shutdown, but even if the government reopens, it may take months for data flows to return to normal.

This lack of data exacerbates divisions that already exist within the FOMC. A dovish camp, possibly including Chair Powell, may stick to the rate-cut path hinted at in the September "dot plot." However, hawkish members of the committee are likely to oppose a third rate cut this year in the absence of new evidence of economic weakness.

For investors, this unprecedented uncertainty greatly increases the risk surrounding the December meeting. The final policy decision may no longer depend on the latest economic indicators, but rather on a divided committee weighing old expectations against new risks. This could result in both hawks and doves casting dissenting votes, adding even more uncertainty to market expectations.

Data Shortage May Exacerbate Internal Divisions

Bank of America's analysis suggests that the September FOMC meeting already revealed deep divisions among policymakers in assessing downside risks to the labor market. At that time, a slim majority believed these risks were sufficient to support at least a 75 basis point rate cut within the year.

In the absence of new data, this dovish group is likely to push for the realization of the expectations set in the September dot plot. The report notes that some dovish members may even believe that a prolonged government shutdown itself amplifies downside risks to economic activity, providing yet another reason to support rate cuts.

However, the hawkish forces within the committee cannot be ignored. The September dot plot shows that seven FOMC participants supported only one rate cut this year. Bank of America believes this camp includes voting members Barr, Goolsbee, Musalem, and Schmid. While they are not expected to object to a rate cut at this week's meeting, pushing for a third rate cut in December may be "too much" for them, especially as state-level unemployment claims remain stable. This increases the risk of at least one hawkish dissent at the December meeting. In addition, dovish member Miran may also cast a dissenting vote.

Timing of Data Recovery Determines Policy Path

The Federal Reserve's final decision in December will depend heavily on when the government shutdown ends and how quickly economic data can catch up. Bank of America has outlined several scenarios.

Scenario 1: Receive an "outdated" September employment report by the end of November. If the government reopens by the end of November, the market should be able to see the September employment report before the December meeting. The report suggests that weak data would reduce the risk of hawkish dissent, but even strong data is unlikely to convince Powell to pause rate cuts, as the report would be considered "outdated."

Scenario 2: Receive both September and October employment reports in early November. If the shutdown ends in early November, allowing the Bureau of Labor Statistics (BLS) to release two reports before the December meeting, the situation becomes more complex. In this case, if the unemployment rate remains steady at 4.3% and economic activity data from September to October is robust enough, a "pause in rate cuts" in December becomes a possible option.

Scenario 3: Data fully catches up, with three employment reports available. The ideal scenario is for the government to end the shutdown soon, allowing the BLS to conduct both October and November surveys and release all three employment reports—September, October, and November—before the December meeting. In this case, Bank of America offers a rule of thumb for decision-making: if the November unemployment rate is less than or equal to 4.3%, the Fed will likely keep rates unchanged in December; if the unemployment rate is greater than or equal to 4.5% (in line with the Fed's Summary of Economic Projections, SEP), it will prompt a rate cut. If the unemployment rate falls in the middle at 4.4%, the December decision will be a "close call" and will depend on a broader flow of data, including inflation.