Fed Faces Tough Call on December Rate Move, Despite Possible Shutdown Ends

Federal Reserve policymakers were forced to make their latest interest-rate call without access to critical economic data, as the ongoing U.S. government shutdown halted key reports. And when those figures finally arrive after the government reopens, they’re unlikely to make the Fed’s next decision any simpler.

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Friday marked the second consecutive month without a national employment report, as agencies responsible for publishing official economic statistics remain shuttered. Even if operations resume soon, any data gathered retroactively will be based on past surveys, potentially reducing its reliability and accuracy.

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Economists warn that with every passing day, the likelihood grows that some October data including jobs and inflation numbers may never be released at all. That lack of visibility will only deepen the debate among Federal Reserve officials about whether the labor market is cooling fast enough to justify another rate cut in December amid persistent inflation risks.

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“This could widen divisions within the Fed,” said Michael Reid, senior U.S. economist at RBC Capital Markets. “The reliability of government data will definitely come into question.”

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Fed Chair Jerome Powell managed to secure consensus for a rate cut in late October, despite the “data drought” caused by the shutdown. But he quickly cautioned that a similar move in December would be far more complicated.

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That sentiment has since been echoed by several Fed policymakers, many of whom have uncharacteristically signaled their views on the upcoming decision weeks in advance.

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In October, officials had access to the latest inflation report but lacked updated employment data. By contrast, when they meet on December 9–10 assuming the shutdown ends before then they may have job numbers but no inflation figures.

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That setup could, in theory, provide clarity since Powell framed the upcoming decision largely around the true state of the labor market. Concerns over slowing hiring during the summer were a key factor behind rate cuts in September and October, as policymakers worried that monetary policy had become overly restrictive.

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During an October 29 speech, Powell noted that “some members of the committee believe it’s time to pause and assess whether there really are downside risks to the labor market.”

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However, even if the delayed October employment report is eventually released, it’s expected to include multiple caveats. For one, economists say it may be hard to gauge how much of any increase in unemployment is due to temporary federal furloughs complicating interpretation. Some analysts even doubt whether the unemployment rate the figure most crucial to the Fed will be published at all.

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The report, produced by the Bureau of Labor Statistics, relies on two key surveys: one of businesses to measure nonfarm payrolls, and another of households to determine the unemployment rate. While companies can typically provide payroll data online, collecting household responses is harder. Workers must recall their employment status for the specific week that includes the 12th of the month and the longer the delay, the less reliable those memories become.

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“At a certain point, the BLS may skip October entirely and focus on November,” said Andrew Husby, senior U.S. economist at BNP Paribas. “That would mean we may never get an official unemployment rate for October.”

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Even if the data is eventually released, economists say parsing out the real trend from the one-off impact of the shutdown will be challenging. If the roughly 650,000 furloughed federal workers are all counted as “unemployed on temporary layoff,” the jobless rate could rise by about 0.4 percentage points, according to the Congressional Budget Office.

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With the shutdown now stretching into its sixth week, it’s also increasingly probable that the Bureau of Labor Statistics won’t release an October consumer price index (CPI). The CPI relies heavily on in-person visits to businesses work that’s been on hold since October 1. While the agency recalled staff earlier to publish September’s CPI for Social Security adjustments, no additional reports have been issued since.

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The absence of clear employment and inflation data leaves the Fed divided. Policymakers focused on the slowing labor market are advocating further rate cuts, while those worried about lingering inflation pressures prefer a pause. Futures markets currently suggest investors expect the dovish camp to prevail, with better-than-even odds pointing toward a December rate reduction.

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That expectation is partly supported by private payroll data from ADP, which showed hiring remained sluggish through October and concentrated mainly in education and health services.

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Still, other indicators complicate the picture. Weekly jobless claims, tracked by state governments even during the shutdown, haven’t shown a meaningful uptick a sign that the labor market may be more resilient than some fear.

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Meanwhile, inflation readings are far harder to substitute, as there are few private-sector alternatives.

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The lack of consistent data has left investors in the $29 trillion Treasury market grasping for clues. Reports from ADP Research, Challenger, Gray & Christmas, and Revelio Labs have sent bond yields moving in opposite directions, reflecting the confusion caused by patchy and conflicting information.

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“The gold standard remains the official unemployment rate and weekly jobless claims,” said Ed Al-Hussainy, portfolio manager at Columbia Threadneedle Investments. “Without those, everyone including the Fed is flying partly blind.”

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