The US central bank’s penultimate interest rate meeting of the year comes against the backdrop of a weeks-long standoff between Republicans and Democrats over health care subsidies, resulting in the halt in the publication of almost all official data.
Without these key insights into the U.S. economy, Fed officials will be forced to set interest rates without the full spectrum of data they normally rely on.
Analysts and traders expect the bank to continue with a quarter of a percentage point cut and cut key interest rates to between 3.75 percent and 4.00 percent, without revealing too much about the last rate cut of the year in December.
The lack of official information complicates the Fed’s ongoing debate over whether to cut rates quickly to support a weakening labor market or hold firm in the face of inflation stubbornly stuck above the bank’s long-term target of two percent, fueled by Donald Trump’s sweeping tariffs on key trading partners.
The U.S. central bank has a bipartisan mandate from Congress to act independently to address both inflation and unemployment, which it does by raising, holding or lowering key interest rates. “They’re going to have to decide how much (inflation) will come versus how much will never come, and that’s the big question right now,” former Fed official Joseph Gagnon told AFP. The argument was that “the strength and inflation are only temporary… but the weakness in unemployment may be longer lasting,” he said.
“In my view, that argument will continue to prevail this month because the data continues to point in that direction,” added Gagnon, a senior fellow at the Peterson Institute for International Economics (PIIE).
– ‘Blunt tools’ –
The only significant data point published since the shutdown began on October 1 was US consumer inflation data, which stood at 3.0 percent in the 12 months through September, according to delayed Labor Department data published on Friday.
But the figure fell slightly short of expectations, cheering financial markets, which closed at new records after the news.
The Fed uses a different benchmark to measure inflation, but that guidance also remains well above the target, according to data published before the shutdown.
At the other end of the mandate, employment has slowed sharply in recent months, with only 22,000 new jobs added in August, while the unemployment rate is near an all-time low of 4.3 percent.
“The goal is to get it exactly right, and that’s difficult with such a blunt instrument,” KPMG chief economist Diane Swonk told AFP, referring to the Fed’s key interest rate.
Swonk expects the Fed to make two more cuts this year and announce an end to its balance sheet reduction program next week – known as quantitative tightening – in light of rising liquidity risks.
– Fueled by political pressure –
The Fed has been rocked this year by brutal attacks on staff controlled from the White House, with Trump often using his Truth Social network to criticize Fed Chairman Jerome Powell, who steps down next year.
The Trump administration has also gone after Fed Governor Lisa Cook, attempting to remove her from office on mortgage fraud charges.
Cook fought back against the legal challenge to remove her, with the case going all the way to the US Supreme Court, which has said it will hear arguments against her in January next year.
The timing of that decision means the Supreme Court is unlikely to rule before the end of February on whether Cook can remain in her post, the deadline by which the US central bank board must decide whether to reappoint regional Fed governors – a process that happens only once every five years.
“It appears that the chances of him being able to perform this maneuver have been significantly reduced,” PIIE’s Gagnon said.
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