No data? No problem. When the Federal Reserve has already made up its mind, missing statistics are little more than background noise.
According to Morgan Stanley analysts, the Fed will press ahead with its plan to cut interest rates even if the US government remains in a self-inflicted data blackout. After all, the situation is clear: the labor market is softening, inflation is cooling, and investors are growing anxious.
Now entering its third week, the government shutdown has thrown the US economy into a state of statistical limbo. Key employment and inflation reports have been delayed, federal agencies are dormant, and Wall Street analysts are left navigating without their usual charts and statistics. It is like piloting the economy by feel. Yet, Morgan Stanley argues that this is sufficient to take action.
“The lack of economic data does not seem to be a problem for the Fed,” Michael Gapen, an economist at Morgan Stanley, said. The regulator has already realized its policy stance is too restrictive, he added.
In other words, despite the lack of up-to-date economic data, it appears that the Federal Reserve has overcorrected by maintaining a policy stance that is too restrictive for the current macroeconomic landscape.
The central bank already delivered a 25-basis-point rate cut in September, presenting it as “insurance” amid uncertainty. Now markets are fully pricing in additional cuts in October and December, with CME FedWatch data showing near-total conviction.
Meanwhile, Washington remains mired in gridlock. A divided Congress has failed to resolve the budget funding impasse, and the government shutdown has become an ongoing political fixture. According to Treasury Department estimates, the shutdown costs the economy $15 billion per week, a hefty price to pay for partisan stubbornness.
Morgan Stanley recommends that investors prepare for a long standoff, meaning that the shutdown may drag on.
Republicans and Democrats are engaged in a high-stakes game of political poker, with taxpayers’ money on the table. Meanwhile, the Federal Reserve is trying to appear calm and insists that it can still assess the balance of risks amid the chaos.
As Congress squabbles and agencies sit idle, market participants are left placing their hopes on another interest rate cut.
Ironically, the Fed now appears to be the most decisive institution in Washington, not because it is bold, but because everyone else has run out of moves.
