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- The US government shutdown meant that the Federal Reserve could not gather normal inflation and labor market data before its last meeting of the year in December.
- Private-sector data showed mixed reports on labor market conditions, making the outlook uncertain, especially without the official data.
- Multiple Fed presidents who pushed for rate cuts are now turning cautious, signaling that a rate cut in December might be too early as inflation remains high.
- Economist Mohammad El-Erian stated that lower-income Americans remained pressured by current economic conditions.
As the year nears an end, the expectations of a rate decision from the Federal Reserve in December continue to be the focus of financial markets, with persistent inflation at 3% and a labor market showing mixed conditions.
The Fed has already cut interest rates twice this year, with a growing number of policymakers shifting towards a pause.
The government shutdown, which began in October and ended last week, has increased complications in how economic data will be released and forecasted due to delays in data releases, leaving a confused outlook for the Fed and economists.
Missing Data Adds More Uncertainty
The recent government shutdown meant that the Fed might not collect normal inflation data and jobs reports before the Fed’s last meeting of the year in December.
Private-sector data has hinted at weakness in the job market as employers aim to reduce costs and use AI instead.
A report from Challenger, Gray & Christmas, which publishes monthly reports of job cuts, reported that layoffs hit their highest level for October in over 20 years as employers shed more than 150,000 jobs, up 183% from the 54,064 job cuts in September. ⁽¹⁾
Meanwhile, payroll processor ADP’s most recent monthly report found businesses added 42,000 private-sector jobs last month, compared with a loss of 29,000 in September. Fed Chairman Jerome Powell stated in his last meeting that a December cut is far from certain.
The White House announced that labor market data and CPI for October may never be released. Economists fear the missing data could lead to weaker economic conditions, softer jobs, and sticky inflation.
FOMC Policymakers Turn Cautious with More Dissents Expected
Several Fed presidents who pushed for rate cuts previously are now acting hesitant on the current outlook.
San Francisco Fed President Mary Daly said that the December decision might be too early to decide on it, and stated that she is looking forward to discussing this with her colleagues. Minneapolis Fed President Neel Kashkari has said that the latest economic data display mixed signals, also acknowledging that inflation remains very high. ⁽²⁾
Boston Fed President Susan Collins stated that the Fed needs very strong evidence of weak economic data before making a decision. She also stated that interest rates need to stay on hold for some time.
After Collins’ remarks and guidance from the White House last Wednesday, official inflation and labor market data may not be published before the Fed’s next meeting despite the reopening of the US government. Financial markets have started to back off from previously firm bets of a 25-basis point reduction in rates next month. ⁽³⁾
Other FOMC members, such as St. Louis Fed President Alberto Musalem, warned that more cuts risk making policy too easy. Fed Vice Chair Philip Jefferson also urged caution because official data is missing. After all these commentaries, the chances of a rate cut in December dropped to 42.6% from 62.4% only a week ago. ⁽⁴⁾
The November meeting had two dissents, which were Collins and Musalem. If the FOMC decides to hold rates steady, Miran could be joined in a dissent by the Fed’s other Trump-appointed governors, Christopher Waller and Michelle Bowman, both of whom have argued for easier policy. ⁽⁵⁾
Big Changes Might Come in 2026
Atlanta Fed President Raphael Bostic, who is considered a hawkish member, will retire in February. Four voting seats will rotate next year, which will replace several current hawkish members with new Fed presidents. There is also speculation about whether Trump’s administration could influence new Fed appointees or even remove some members from the committee. ⁽⁶⁾
Stress Builds Among Lower-Income Americans
Famous economist Mohammad El-Erian warns that lower-income Americans are under heavy pressure and concerned about their future income, pointing to recent labor market weakness as the reason.
Lower-income Americans are living paycheck to paycheck or spending more than 95% of their income on necessities, according to Bank of America. ⁽⁷⁾
El-Erian stated that if the lower-income households stop spending, not by choice but by the inability to spend, it could hurt the economy. Consumer spending remains a major driver of economic growth, contributing around 68% of the US’s GDP. ⁽⁸⁾
During this fall, delinquencies on subprime auto loans caused regional banks to take heavy losses, raising questions about whether the economy will suffer from credit risk. (A subprime loan means loans given to borrowers with low credit scores, unstable income or very high risks of no repayments.) ⁽⁹⁾
JP Morgan also suffered from subprime auto loan losses. CEO Jamie Dimon warned that “where there is one cockroach, there could be more”.
Bottom Line
When the Fed announces its final rate decision of the year on December 10th, most officials could lean toward holding rates at 4%.
As inflation sits above target and labor market conditions remain uncertain, the Fed appears ready to pause and become more cautious, relying on clearer signals before acting again.
