Weekly Economic Trends and Indicators

The Headline:

Last Wednesday, the Federal Open Market Committee (FOMC) of the Federal Reserve voted to decrease the target range for the federal funds rate by 1/4 percentage point to 3.75 to 4%. While the move was anticipated, opinions differ over whether to cut and how much. One member of the FOMC voted for no change while another member voted for a ½ percentage point cut.

The Details:

Typically, the Fed cuts short-term interest rates when the economy is slowing down. Lower interest rates help to increase the amount of investment spending by businesses as well as consumer spending. However, lower interest rates tend to increase inflation. For most of this year, the Fed held their policy rate constant as the risks to the labor market and inflation were roughly in balance. When the Fed lowered the policy rate in September, the first cut in several months, it was an acknowledgement of the increasing risk to the labor market. Many commentators immediately predicted further cuts to finish out the year.

However, Federal Reserve Board Chair Jerome Powell attempted to curb that speculation by noting in the post-meeting press conference that the future path of policy is not set in stone.

In the Committee’s discussions at this meeting, there were strongly differing views about how to proceed in December. A further reduction in the policy rate at the December meeting is not a forgone conclusion—far from it. Policy is not on a preset course.

The Context:

How are we to interpret this statement that December decision “is not a foregone conclusion”? The markets have weighed in with their opinion, at least for now. Market expectations for a rate cut in December fell from near certainty (94%) before the meeting to 67% by Monday. Bond yields saw the largest rise in over a month as talk of stubborn inflation remained in the picture.

The fact that government data on the economy is on hold because of the federal government shutdown is also being felt by both the Fed and the markets. Some say that the lack of data means that policy decisions should essentially go into a holding pattern and wait for data to arrive. Others would argue that policy should continue to follow the same plan as before the shutdown. Private-sector data sources can temporarily fill some of the gap and allow policy makers to cautiously move forward.

The word of the day is still “uncertainty.” Some of the unanswered questions clouding the picture include the effect of tariffs on inflation, the extent of labor market weakening, and the impact of AI on productivity. Even if the shutdown ended tomorrow and the flow of data was restored immediately there would still be substantial uncertainty, just as there has been for much of the year. The next decision by the Fed can now be added to that list of uncertainties.

Next week: Inflation update