By Howard Schneider
WASHINGTON (Reuters) -The Federal Reserve is expected to cut interest rates by a quarter of a percentage point on Wednesday as policymakers steer the U.S. economy based on limited data that has nevertheless kept concerns about the strength of the job market top of mind.
Economists polled by Reuters were nearly unanimous in expecting the U.S. central bank to reduce its benchmark policy rate to the 3.75%-4.00% range when its latest two-day meeting concludes.
But it’s a decision at least partly based on inertia, not the firm grounding in data Fed officials like to say they use in setting monetary policy.
A federal government shutdown, now in its 29th day, means the U.S. central bank did not receive the official employment report covering the month of September, a key input to its policy discussion when officials are focused on the strength of hiring and the evolution of the labor force under President Donald Trump’s tightened immigration policies.
Through August, the last month for which the Bureau of Labor Statistics published a jobs report before the shutdown began on October 1, the unemployment rate had been rising slowly, up from 4.0% in January, when Trump began his second term in the White House, to 4.3%.
But the pace of hiring had fallen dramatically, with a decline in the number of foreign-born people looking for work helping temper what might have otherwise been a much larger increase in the jobless rate.
While Fed officials feel the job market remained roughly balanced between the demand for and supply of workers, they were also concerned that businesses might begin to cut hiring even further or resort to layoffs given concerns about underlying economic growth – a risk highlighted by both recent layoff announcements at Amazon.com and an uptick in state unemployment claims. State employment agencies are still collecting and publishing weekly data on applications for unemployment benefits, providing one barometer for the health of the labor market.
A final report on inflation in September, released last week on orders from the White House because it figured into the calculation of Social Security benefit increases, showed the Consumer Price Index rose at a slower-than-expected pace last month as tepid housing inflation offset increases in the costs of gas and imported goods now subject to tariffs.
The combination of relatively positive inflation news and ongoing job market concerns means “there hasn’t been much basis for changing views” since policymakers in September indicated that quarter-percentage-point rate cuts were likely at the October 28-29 and December 9-10 meetings, wrote Steven Englander, head of North America macro strategy at Standard Chartered.
The Fed’s latest policy decision and statement will be released at 2 p.m. EDT (1800 GMT). Fed Chair Jerome Powell is scheduled to hold a press conference half an hour later to discuss the meeting. The central bank will not issue any updated economic projections from its policymakers on Wednesday, placing more emphasis on Powell’s remarks for insight into how they perceive the economy and the likely path of monetary policy.
FED OPERATING ‘IN A FOG’
Financial markets will be focused on the number and nature of possible dissents by Fed officials on the rate decision and policy statement, which along with the expected cut in borrowing costs may see the Fed announce an end to its balance sheet drawdown.
Englander said Fed Governor Stephen Miran, on leave from his job as an economic adviser in the White House, could object for the second straight meeting in favor of a half-percentage-point rate cut, while other policymakers more concerned about the inflation trajectory may prefer no cut at all.
Fed Vice Chair for Supervision Michelle Bowman, who wants the central bank’s footprint in financial markets to be as small as possible, may object to stopping the balance sheet decline with the holdings still around $6.6 trillion, Englander said.
Any dissents, and Powell’s characterization of the economy and expected future policy choices, will necessarily be conditioned on the flow of official data, which only promises to get worse as the shutdown continues.
The White House announced last week that the CPI report for October is unlikely to be published since the extensive survey work required to prepare it has been halted during the shutdown. Other major reports also are affected – the jobs report for October normally would have been published a week from this Friday and a report on overall economic output for the third quarter would have been published this week.
In the event that there is a deal to reopen the government soon, the Fed would have about six weeks for any catch-up data to arrive before its final meeting of the year.
Even absent some of the missing reports, Fed policymakers say they can fill in some gaps on their own, with their extensive local surveys of business executives, for example, offering a lens on hiring and firing in particular.
But Fed policymakers regard official statistics on inflation as harder to replicate, leaving a key gap as they try to steer the pace of price increases back down to the central bank’s 2% target.
Meanwhile, the delayed reports on GDP, consumer spending, and other aspects of the economy leave unresolved the tension policymakers have noted between reasonably solid economic activity and a slowed pace of hiring – a dichotomy officials said would likely move soon either towards continued growth and renewed hiring, or towards a more pronounced slowdown on both fronts.
It may now be harder to see when that shift occurs.
“The government shutdown has … left the central bank in a fog about the labor market, fueling support for another cut rather than risk falling behind and having to cut more later,” Ryan Sweet, chief U.S. economist for Oxford Economics, wrote ahead of the Fed’s policy decision.
The longer the shutdown lingers, the more officials will have to rely on second-order data sources and their own “discretion” over how to interpret them, with recent surveys for example showing confidence among businesses and consumers beginning to flag.
“Discretion will remain a factor in December and the longer the government shutdown drags on, the higher the odds of another rate cut,” Sweet said.
(Reporting by Howard Schneider in Washington; editing by Dan Burns and Paul Simao)
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