The non-farm payrolls are "gone," and next week's US CPI will also be "gone." Can the Fed still "close its eyes and cut interest rates" in December?

The U.S. government is caught in a prolonged shutdown, and the release of key economic data has come to a standstill. For a Fed that is already in one of its most severe states of division in recent years, the upcoming December monetary policy meeting faces the dilemma of making difficult choices in an information vacuum.

The latest development is that the October CPI, which was scheduled to be released next week, is also in jeopardy. According to Bloomberg, the U.S. Bureau of Labor Statistics has not only postponed the release of the report but has even suspended the collection of offline data. The market increasingly believes that the Bureau of Labor Statistics is likely to completely abandon the release of the October CPI report.

Before this, two monthly employment reports had already been delayed. The absence of official inflation and employment market data will make the debate within the Fed about whether there is a need to cut interest rates again in December longer and more complex.

Despite the market's inclination for a rate cut in December, the lack of official data may provide policymakers, who are concerned about a resurgence of inflation, with a sufficient reason to maintain interest rates next month.

Therefore, in the absence of hard data, investors will turn their attention to the public speeches of several Fed officials next week, including John Williams, Raphael Bostic, Stephen Miran, and Alberto Musalem, hoping to find clues about the policy path.

Data vacuum exacerbates decision-making dilemmas.

For the Fed, which relies on data to make decisions, the current situation is extremely challenging. Although policymakers received the CPI data for September before the last meeting, they were already missing the latest employment report at that time. Now, the ongoing absence of employment reports and key inflation data is challenging the foundation of policy-making.

Fed Chairman Powell stated that the rate cut in December is not a done deal after the rate cut in October. For those FOMC members focused on the risk of inflation potentially re-accelerating, the absence of official data may further reinforce their stance to maintain interest rates unchanged in December.

Even if the government reopens in the coming weeks and statistical work resumes, Fed officials may face data compiled through retrospective investigations, the accuracy and timeliness of which will be questioned.

BNP Paribas believes that even if some data is restored, the schedule will be severely delayed.

Alternative indicators are difficult to solve the “urgent problem”.

During the “black box” period of official data, the market was not entirely without reference. Some employment market reports released by the private sector are helping to fill some gaps. However, in terms of inflation, alternatives to government data are not only harder to obtain but also have a more limited scope.

For example, the Cleveland Fed's “nowcast” model shows that the year-on-year increase in October's CPI may be similar to the lower-than-expected 3% in September. The year-on-year increase in the core CPI for September was also 3%.

Nevertheless, these alternative indicators are difficult to completely replace the authority of official reports. Analysis from Bloomberg Economics points out that if the government can resume operations in a timely manner, it would also be challenging for the Bureau of Labor Statistics to collect and process the October and November CPI reports before the December FOMC meeting. The economists on the team believe that “the data from October could have given the green light for a rate cut at this year's final meeting.” This highlights the decision-making costs brought about by the lack of data.

The end point of the shutdown becomes a key variable.

Looking ahead, the Fed's final decision in December will heavily depend on when the government shutdown ends and to what extent economic data can catch up with the schedule.

The Bank of America conducted several scenario analyses on this, revealing the potential impact of different data recovery progress on policy decisions:

Scenario 1: Receiving an “outdated” September employment report. If the government reopens before the end of November, the market could see the September employment report before the December meeting. Bank of America believes that even if the data is strong, it is unlikely to convince Powell to pause rate cuts, as it will be seen as “outdated.”

Scenario 2: Obtaining the employment reports for September and October. If the shutdown can end in early November, it would give the Bureau of Labor Statistics the opportunity to release two reports before the December meeting, complicating the situation. If the unemployment rate remains stable at 4.3% and economic activity data is sufficiently robust, then a “pause in rate cuts” in December could become a possible option.

Scenario 3: Obtaining three complete employment reports. In the best-case scenario, if the government quickly ends the shutdown, the Bureau of Labor Statistics can release the September, October, and November employment reports before the December meeting. Bank of America proposed a rule of thumb for decision-making: if the November unemployment rate is at or below 4.3%, it will prompt the Fed to keep interest rates unchanged in December; whereas if the unemployment rate is at or above 4.5% (consistent with the Fed's economic projections), it will lead to a rate cut. If the unemployment rate falls in the middle ground of 4.4%, the December decision will be a “close call.”