Shutdown Delays Data, Clouding Fed's December Rate Path

Federal Reserve Chair Jerome Powell signaled Monday that another rate cut in December would be "challenging," citing economic uncertainties and the ongoing government shutdown that has delayed critical data releases. The comments come as markets price in a 90% chance of a 25-basis-point reduction at the central bank's December 9-10 meeting, according to the CME Group's FedWatch tool. However, analysts caution, a Nasdaq report that the path to a cut remains fraught with risks, including the potential for further economic volatility if the shutdown extends beyond November.

The Fed's hesitation reflects broader market anxieties. While the S&P 500 hit record highs this week amid expectations of easing monetary policy, investors are closely watching inflation data and manufacturing reports to gauge the central bank's next move, a TradingView analysis. A preliminary report from the Automatic Data Processing (ADP) showed modest improvements in private-sector job growth, averaging +14,000 over the past four weeks—a sign of resilience despite the shutdown. Still, the Fed's internal survey projects only a 92% probability of a December cut, with the possibility of another reduction in January if conditions evolve.

Mortgage rates, which have already fallen to 6.19% from 7% at the start of the year, have become a focal point for homebuyers. Experts warn that waiting for further declines could be risky, given the unpredictable nature of economic data releases and the Fed's tightening timeline, a CBS News article. "Rates are already significantly lower than they were most of the year," said one analyst, noting that refinancing options remain viable if rates dip further.

Meanwhile, the political landscape is shifting. President Donald Trump's administration announced a shortlist of five candidates to replace Powell as Fed chair, including Federal Reserve governors Christopher Waller and Michelle Bowman, former governor Kevin Warsh, and BlackRock's Rick Rieder, a Business Standard report. Trump, who has criticized Powell for delaying rate cuts, aims to finalize the replacement by year-end, adding another layer of uncertainty to the Fed's policy trajectory.

The government shutdown, now in its fourth week, continues to weigh on the economy, with estimates of $15-30 billion in weekly output losses. While consumer spending and low unemployment have so far cushioned the blow, prolonged disruption could tip the economy into recession. The Fed's decision to maintain a cautious stance underscores the delicate balance between cooling inflation and avoiding a sharp slowdown.

As markets brace for Powell's post-meeting press conference, the central bank's messaging will likely shape the trajectory of rate cuts in 2026. With the S&P 500 up nearly 4.5% since October 11 lows and tech earnings season in full swing, investors are seeking clarity on whether the Fed will adopt a more dovish tone.