Government Reopens…What About the Data?…Divided Fed Puts December Cut at 50/50…Tariff Policy Focusing on “Affordability”
The longest government shutdown in history is over after 43 days. The impact on economic growth is estimated at a negative 1.5% for 4th quarter, and the reopening lasting beyond the next “cliff” in 10 weeks (Jan 31) is by no means assured.
The Data: Government statistical agencies are back to work producing the delayed economic reports, but the rollout will be intermittent and incomplete. Revised schedules are being released soon, here’s what we expect: September Jobs Report: The release was scheduled for October 3, and the data had been collected. It is expected around November 18 or 19, with forecasters and private data estimating about 50,000 jobs added. September PPI: Should also come out next week; consensus is a 0.3% increase (after declining 0.1%). September Retail Sales: Data is incomplete, may take longer. October Jobs Report: Data was not collected during the shutdown. A payroll report will be released, but for the first time since 1913, no October unemployment rate or CPI rate will be published. Private sector estimates put the CPI rate increase at 3.1%. Reports: Usually released in December, now look like they will be delayed by about a week.
The Fed: The December meeting is shaping up to be the most contentious in a long time regarding rate policy. The absence of data (“flying blind”), conflicting mandates (full employment and low inflation), and a debate over the implementation of policy is splitting Fed.
Latest FedSpeak – KC Fed President Schmid: He is concerned about “too hot” inflation and could dissent again at the Fed’s December meeting against a rate cut. He remarked: “(Inflation) was my rationale for dissenting against the rate cut at the last meeting and continues to guide my thoughts as I head into December. I view the current stance of monetary policy as being only modestly restrictive, which is about where I think it should be.” Boston Fed Pres Collins: She voted for both cuts this year, but now sees a “relatively high bar” for additional easing, citing worries about elevated inflation: “It will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment.” She also cited the lack of data as creating uncertainty. Collins is considered a “centrist” on the committee and an ally of Powell. Her remarks underscore the deepening divisions at the Fed and the lack of consensus around another rate cut: “It seems prudent to ensure that inflation is durably on a trajectory back to 2% before making any further cuts.” Fed President Musalmen: Worried that policy is becoming “too easy.” Fed Vice Chair Jefferson: “…proceeding slowly is prudent given the lack of data.”
Leading the charge for cuts is the latest appointee, Fed Gov Miran: “To keep policy so tight in response to an artifact of the statistical measurement process, rather than any actual supply-demand imbalances in the economy, will then create the labor market weakness that we were tasked with avoiding.” He believes inflation tracking isn’t capturing declines in rents as demand drops due to the immigration crackdown. His view is that inflation data is “backward-looking” and that the Fed should be cutting rates in anticipation of economic conditions 12-18 months from now. This is a departure from the Fed’s usual “data dependency” and a rethinking of policy-setting methodology. SF Fed President Daly indicated she is “open-minded.”
Fed Futures markets indicate a 43% chance of a cut in December (down from 96% last month). The January meeting (after the data has “caught up”) looks like a 65% chance. The 10-year Treasury is at 4.12%, as yields rose when the government reopened, a lack of data provided clarity, and the “priced-in” December rate cut has been removed. Stay tuned…
By David R. Pascale, Jr., Senior Director