Fed's Rate Dilemma: Data Gaps Fuel Policy Divide

The U.S. economy faces a critical juncture next week as it grapples with the aftermath of a two-month government shutdown and the Federal Reserve's escalating internal divisions over interest rate policy. With the first post-shutdown non-farm payrolls report slated for release, policymakers and markets remain in limbo over whether the Fed will deliver a third rate cut at its December meeting.

The shutdown has disrupted the flow of key economic data, including October jobs and inflation figures, leaving the Fed without crucial metrics to gauge the economy's health.

The White House and Congressional leaders have acknowledged that October's employment and consumer price index (CPI) data may never be fully released, as the Bureau of Labor Statistics and other agencies were unable to complete surveys during the shutdown. Economists have urged the Labor Department to prioritize the publication of November data to ensure the Fed has timely insights for its December policy meeting according to Reuters. Without updated data, the Fed risks making decisions based on incomplete or outdated information, a scenario that has already delayed its ability to assess inflation and employment trends.

Internally, the Fed is witnessing a growing rift. Boston Fed President Susan Collins and Atlanta Fed President Raphael Bostic have openly opposed a December rate cut, citing stubborn inflation and resilient economic conditions. Collins emphasized the challenges of formulating policy in a data-scarce environment, stating, "It will likely be appropriate" to keep policy rates at the current level for some time in this highly uncertain environment. Bostic echoed concerns about inflation, warning that businesses plan to raise prices in 2026, signaling persistent inflationary pressures. Their stances contrast with those of officials like Fed Governor Stephen Miran, who argue that recent inflationary spikes are temporary and that rate cuts remain necessary to support growth according to Finance-Commerce.

Market uncertainty has intensified as the Fed's divided stance has left investors guessing. The CME FedWatch Tool pegs a 68% probability of a 25-basis-point cut at the December meeting, with a potential pause afterward until 2026. Financial stocks have reflected this volatility, with banks and insurers falling amid the uncertainty. Meanwhile, the FOMC's minutes from its October meeting, set for release next week, could offer further clarity on the committee's divided thinking.

The broader economic implications of the shutdown linger. The Congressional Budget Office estimated that fourth-quarter growth will be reduced by 1.5 percentage points due to the shutdown's impact on government operations and data collection. Additionally, delayed economic reports have left private sector efforts to fill the void, though their accuracy remains unverified. The Fed's decision on rates will not only shape monetary policy but also influence consumer borrowing costs, as seen in the marginal declines in home equity loan rates following recent rate cuts.

As the Fed navigates this complex landscape, its December meeting will serve as a pivotal test of its ability to balance inflation control with economic resilience. The outcome could set the tone for 2026, particularly with Fed Chair Jerome Powell's term expiring in May 2026 according to Seeking Alpha.