The U.S. Federal Reserve is poised to implement its second short-term interest rate cut of the year this Wednesday, amidst growing uncertainties regarding the economy. Recent government shutdowns have obscured the economic data critical for the Fed’s decision-making process, which influences employment, inflation, and overall economic performance.
Data Drought Impacting Economic Forecasts
The shutdown, which began on October 1, has hindered the release of crucial reports, leaving September’s job figures delayed. These measures are expected to be made available on November 7, but may be less comprehensive due to ongoing disruptions. Additionally, the White House indicated last week that the upcoming inflation report for October might not be published at all.
Risks of Continuing Rate Cuts
The Federal Reserve’s objective of maintaining economic growth and job creation is challenged by this data vacuum. Financial markets now anticipate additional reductions in rates this December, supported by signals from Fed officials indicating the same in their last meeting.
- The current key interest rate stands at approximately 4.1%.
- Fed officials believe this rate is constraining economic growth.
- An average of only 29,000 jobs were added monthly over the past three months, as reported by the Labor Department.
However, signs from payroll processor ADP suggest a potential rebound in hiring, indicating that businesses began adding jobs again after cutbacks in July and August.
Inflation Considerations
Recent inflation statistics revealed that while prices remain high, they are not accelerating, potentially reducing the need for further interest rate hikes. The delayed inflation report was released over a week late due to the shutdown.
Upcoming Economic Reports
Critical reports on economic growth for the July-September quarter and consumer spending are both postponed. Despite these challenges, Federal Reserve officials are closely monitoring alternative data sources and assert that they are not significantly hindered by the delayed government reports.
Possible Changes to Securities Holdings
In addition to interest rate cuts, the Fed may also announce a halt to the reduction of its extensive securities holdings, a strategy employed during and after the pandemic and the Great Recession. The Fed significantly increased its holdings, purchasing nearly $5 trillion in Treasury securities and mortgage-backed bonds to support the financial markets.
- Current securities holdings stand at around $6.6 trillion.
- The Fed is currently reducing mortgage-backed securities by up to $35 billion monthly and Treasuries by $5 billion.
Ending the rolloff of its securities could modestly lower long-term interest rates related to mortgages, although substantial impacts on consumer borrowing costs are unlikely. Fed Chair Jerome Powell recently noted that policymakers might expedite this process due to indications that banks are running low on reserves.
Moving forward, all eyes will be on the Federal Reserve’s decisions as they navigate this complex economic landscape filled with uncertainties.
