Note: There was a separate Economic Commentary on October 29 discussing the Federal Reserve’s October rate-setting meeting
Trend watch
The government shutdown is now entering its fifth week, which translates into more than a month’s worth of delayed economic data for everything from retail sales and new home sales figures to trade data and wholesale prices.
As a reminder, on slides 3, 4, and 5, we’ve marked the impacted indicators in red and are changing the trend to “Ø” once a data release has been missed since a stale trend shouldn’t be relied upon. Note: Slides are available to clients in the full report.
Our take
As we expected, the Federal Reserve (Fed) moved forward with a second consecutive quarter-point (0.25%) rate cut, lowering the target range for the federal funds rate to 3.75% – 4.00%.
During the post-meeting press conference, Fed Chair Jerome Powell was clear in stating that a December rate cut was “far from” a foregone conclusion.
Moreover, there’s some disagreement on the next move within the rate-setting committee. There were two official dissents at the October meeting vote as the Fed’s newest member – Fed Governor Stephen Miran – wanted a larger 0.50% rate cut, while Kansas City Fed President Jeff Schmid was in favor of holding the benchmark rate steady. In the subsequent days, Dallas Fed President Lorie Logan and Cleveland Fed President Beth Hammack both publicly said they also preferred to hold rates steady – although neither is currently a voter.
In light of the dissents at the October meeting vote, as well as the comments from Powell, Logan, and Hammack, a third consecutive rate cut at the December meeting clearly isn’t a lock. It’s also important to note that the aforementioned dearth of government-sourced economic data due to the shutdown clouds the view.
In our view, recent inflation readings have been more benign than feared, while the labor market has slowed meaningfully over the past five months. That probably raises the chances of one more rate cut by year end, but the disruption in economic data provided by government agencies and the continued whipsaws in U.S. trade policy, along with the inflation–tariff dynamics we’ve noted here, complicate Fed policy decisions in the very near term.
The Fed’s rate decision in December will be driven by the economic data received over the next six weeks, though the chances of getting caught up on all the delayed data prior to December 10th diminishes with each day the shutdown drags on. To us, this cauldron of uncertainty increasingly means the Fed will kick the can down the proverbial road to the January 28th meeting.
Regardless, maintain our belief that near-term Fed rate cuts in and of themselves likely won’t be the savior for the current affordability challenges in the housing market. To wit, the lack of housing supply in many markets has pushed up home prices, which more than offsets the modest relief borrowers would see from lower mortgage rates. In fact, stronger home sales due to lower mortgage rates may make the higher home prices issue worse in the near term. Moreover, Fed rate cuts have limited direct influence on short-term mortgage rates and certainly aren’t on the same timeline. Over time Fed rate cuts will help lower rates – and not just for mortgages.
What matters most now is the action the Fed takes in the next 6–12 months. We continue to expect the Fed to lower the federal funds rate to a more neutral setting near 3% as we progress through 2026, although we anticipate the pace will continue to be gradual.
Bottom line
The U.S. economy remains in a muddle-through environment. The shutdown is delaying most government-sourced economic data. We expect the Fed to continue moving cautiously.
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