With the US government shut down, the Fed has a larger role to play in the Forex market. That makes Wednesday’s release of the minutes from the September meeting all the more important. Traders will be closely watching for signs that the FOMC is on track for a rate cut later this month.
Fed officials who have spoken publicly since the last meeting have shown that a divide remains on the monetary policy outlook. Even after the near-unanimous agreement to cut rates last month, a strong contingent remains worried about inflation rising as a result of tariffs. That contingent could get stronger as the Fed doesn’t get essential inflation figures due to the government shutdown.
The Shutdown Makes Cuts More and Less Likely
Analysts are also divided on what effect the shutdown will have on the Fed and monetary policy. Generally, a government that idles non-essential services would contribute to a slower-growing economy, particularly if President Trump goes through with his threats to fire workers, which would slow down consumer demand. The Fed is concerned about rising unemployment, which would suggest that further rate cuts are more likely, at least in the medium to long term.
On the other hand, the information blackout could put more emphasis on the inflation aspect. The last published data point for inflation showed the PCE rising to 2.7% from 2.6% previously. Although the core rate stayed unchanged at 2.9%, the headline number suggests a worrying trend. Without new data coming out, there would be no confirmation that the upward trend has reversed.
Calming Fears at the Fed
Another aspect is that, for months now, economists and even members of the FOMC have predicted that inflation will rise due to tariffs. And then the actual data comes out below expectations, calming those concerns. The same kind of thinking among economists and Fed members is in play in estimating the inflation rate for September.
But, unless the government reopens, there won’t be any data coming out below expectations to convince FOMC officials that inflation isn’t rising too fast. This might lead the Fed to be more cautious about cutting rates, at least until the latest inflation becomes available.
The Odds of a Rate Cut
In the immediate aftermath of the government shutdown, markets were pricing in an almost 100% chance of a 25bps cut at the October meeting. Since then, the odds have been drifting lower and are now down to 92%. This remains a fairly solid consensus for a cut, but the trend suggests that the market may be becoming less sure about the FOMC’s willingness to ease.
The upcoming minutes might help reassure markets that the Fed is firmly on a path of easing. That would imply the minutes suggest that the primary concern of the FOMC is the weakening labor market and slowing economy. However, if the minutes reveal persistent worries about inflation, the market may continue to price out a rate hike, which would likely support the dollar and weigh on gold.