Fed
Policy in the Fog
With the shutdown now at a
close, attention shifts the Federal Reserve for guidance on policy heading into
the new year. After a month and a half without official economic data,
the Fed's language and tone will offer critical insight into the path forward.
There will be one more FOMC meeting in December which will determine whether
another rate cut is on the table. Expectations for further easing have lowered
since Fed Chair Jerome Powell signaled to a more cautious stance,
remarking "what do you do if you’re driving in the fog? You slow
down." Futures markets now assign less than a 50% probability to a
December rate cut. Still, uncertainty looms large: the absence of market data
leaves policymakers navigating blind, while mixed signals from Fed officials
suggest internal debate over the appropriate pace of policy adjustment.
Inflation Concerns: Price
Stability Takes Priority
Inflation seems to be presenting
itself as the bigger issue over the other side of the Fed's dual mandate--
employment. Recent commentary from both Fed officials and market participants
suggests that price stability is now the primary concern. Persistent
inflationary pressures, particularly in core services and housing, have raised
questions about whether the Fed can maintain its current stance without
tightening further. The lack of fresh economic data only amplifies uncertainty,
leaving policymakers to rely on anecdotal evidence and market signals. If the
Fed takes a cautious approach as we near year-end, it will reaffirm their
commitment to restoring price stability before easing policy.
Bridging the Information Gap
Now
that the government has reopened, the backlog of delayed releases is starting
to clear. The September jobs report, originally scheduled for early October,
will be published this Thursday. This will give us the first glimpse into labor
market health since the beginning of the shutdown. On Wednesday, the Fed will
release minutes from its last meeting, which should provide insight into
policymakers' thinking amid the data blackout. Other key releases this week
include housing starts and building permits on Wednesday, existing home sales
on Thursday, and the University of Michigan's final consumer sentiment reading
on Friday. These reports are set to help fill the information gap and shape
expectations for the Fed's December meeting.