Fed Walks Tightrope: Shutdown Delays and FOMC Divisions Cloud Rate Cut Decision

Federal Reserve Chair Jerome Powell is set to deliver a speech next week, offering fresh insights into the central bank's strategy amid a backdrop of expected rate cuts and ongoing government shutdown disruptions. The Federal Open Market Committee (FOMC) is anticipated to reduce the federal funds rate by 25 basis points at its October 29 meeting, bringing the target range to 3.75%-4%. This aligns with projections from fixed income markets and the FOMC's September Summary of Economic Projections, which signaled a need to address soft labor market conditions and moderate inflation, currently at 2.9% for core PCE prices Fed Expected To Cut Interest Rates Again In October - Forbes^[1].

The Fed's decision faces added complexity due to the government shutdown, which has delayed critical economic data. The Bureau of Labor Statistics (BLS) postponed its September jobs report, scheduled for October 3, and subsequent reports, including the October CPI release on October 15, may also be delayed. Private-sector data, such as the ADP National Employment Report showing a 32,000 jobs loss in September, and real-time labor market indicators from the Chicago Fed, are being used as alternatives. However, economists caution that the absence of official data could complicate the Fed's assessment of inflation and employment trends .

Powell's speech, delivered on September 23, emphasized the Fed's dual mandate of balancing inflation and employment risks. He acknowledged the challenge of navigating a labor market with rising unemployment risks and inflation pressures, stating, "If we ease too aggressively, we could leave the inflation job unfinished... If we maintain restrictive policy too long, the labor market could soften unnecessarily." The FOMC's recent 25-basis-point cut reflected a shift toward a "modestly restrictive" stance, with officials like Minneapolis Fed President Neel Kashkari advocating for faster normalization of rates to address weakening labor conditions Speech by Chair Powell on the economic outlook^[2].

Divergent views within the FOMC highlight the uncertainty. While three members-Christopher Waller, Stephen Miran, and Philip Jefferson-have publicly supported further cuts, others, including Governor Michelle Bowman, have urged caution. Bowman warned against a "premature declaration of victory" on inflation, which remains above the 2% target. Kashkari, however, argued that inflation risks are manageable, citing declining wage growth and core non-housing services prices .

The government shutdown's timing has raised concerns about its impact on the Fed's decision-making. The BLS's delayed jobs report, a key input for the October 30-31 FOMC meeting, leaves policymakers reliant on less comprehensive data. Bank of America economists noted that while private data provides a "partial picture," prolonged shutdowns could erode the accuracy of economic assessments. Historical precedents, such as the 2013 shutdown, saw delayed reports but maintained data quality, though extended disruptions could test this resilience .

Looking ahead, the Fed faces a delicate balancing act. A further 25-basis-point cut in late 2025 is widely anticipated, with Kashkari and others signaling openness to more aggressive action if labor market deterioration accelerates. The October 30-31 meeting will be pivotal, as the Fed weighs the delayed data against its mandate to stabilize inflation and employment. Powell's speech and the FOMC's rate decision will shape market expectations, with investors closely monitoring for clues on the path of monetary policy in a year marked by geopolitical and economic uncertainties Fed Expected To Cut Interest Rates Again In October - Forbes^[1].