Wall Street Predicts 0.25% Fed Rate Cut Amid Data Void

Anticipating the Fed's Decision

As the federal government remains in shutdown mode, the Federal Open Market Committee (FOMC) is set to announce its decision on the nation's base interest rate today, albeit without some vital economic data. Consequently, when Chair Jerome Powell holds his press conference later this afternoon, analysts are bracing for a less informative update regarding the overall health of the economy.

Wall Street's Expectations

On Wall Street, the consensus leans heavily towards the expectation of a rate cut being confirmed today. Although some of the more dovish members of the FOMC might argue for a more drastic cut of 50 basis points, market indicators suggest a staggering 99.9% chance that a 25-basis-point reduction will be the outcome. According to CME’s FedWatch tool, traders are placing a 0% probability on a 50-basis-point cut and a mere 0.1% likelihood that the Fed will decide to hold rates steady.

Lacking Key Economic Indicators

Despite having access to a variety of data from private sources and regional reserve banks, the FOMC finds itself without critical insights typically provided by government agencies due to the ongoing shutdown.

Some of this missing information directly impacts the Fed's dual mandates of ensuring maximum employment and maintaining stable inflation around the 2% target. Notably, the Bureau of Labor Statistics (BLS) has not released its employment situation report since the start of September, which has left the FOMC with limited data to assess the employment landscape, a critical component of its mission.

Inflation Insights

On a more positive note, the BLS has managed to publish its inflation figures. The consumer price index released last Friday indicated a 0.3% increase for September, following a 0.4% rise in August. While this data shows relatively stable inflation, contributing to an overall 3% rate (before seasonal adjustments) over the past year, it is still a far cry from the alarming scenarios that many had feared, particularly during the tumultuous period of President Trump’s tariff policies.

Focus on Alternative Policies

Given the lack of substantial economic data, analysts anticipate that Chair Powell's update will shift away from the current economic climate and instead explore other monetary policy tools. As noted by Jim Reid from Deutsche Bank in a communication to clients this morning, "With the U.S. government shutdown now in its fifth week, our economists predict that Chair Powell’s press conference will pivot away from economic data—due to its scarcity—and instead emphasize balance sheet policy, the review of the policy framework, and financial stability."

Reid further indicated that the team expects the Fed to announce an end to its quantitative tightening (QT) program today, with the run-off expected to conclude next month.

Fed's Balance Sheet Attention

In light of the absence of key economic data, Fed decision-makers have been increasingly focusing on the Fed's balance sheet. In his most recent speech, Powell discussed the Fed's liabilities, which totaled approximately $6.5 trillion as of October 8, and concluded, "The bottom line is that our ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability."

Shifting Press Conference Dynamics

UBS's chief economist, Paul Donovan, has also pointed out that Powell may adopt a different approach in today’s press conference. "The lack of credible short-term data since the last Fed meeting implies that policymakers cannot adhere to Fed Chair Powell’s 'data dependency' principle and must instead concentrate on broader economic trends. Market attention will likely focus on the range of perspectives, the tone of the press conference, and, inevitably, speculation surrounding Powell’s potential successor," Donovan remarked.

Setting the Tone

The scarcity of data also means that Powell will likely avoid making any statements that could imply a future course of action—either towards additional cuts or a shift in policy direction later this year.

While private data does not point to any significant negative surprises in upcoming payroll figures, the FOMC remains in a delicate balancing act as it navigates these uncertain waters.