By: Aaron Wall, CFA
Partner, Portfolio Manager
This week, the longest U.S. government shutdown came to an end. The new agreement funds the broader government through January 30 and also includes annual funding for the Agriculture Department, military construction and the legislative branch. This narrows down the list of items to be hashed out in several months. As part of the negotiation, Republicans agreed to hold a vote on the potential extension of COVID-19 healthcare subsidies in December.
December Fed Meeting: Doves vs. Hawks
“What do you do if you’re driving in the fog? You slow down,” said Jerome Powell during his October 29 press conference. During the shutdown, we missed quite a few reports from the Bureau of Labor Statistics, and it doesn’t seem likely that the reports will ever be released since BLS employees were not able to collect the data in real time.Looking at the Fed’s upcoming December meeting, it is easy to understand Powell’s metaphor. Nick Timiraos summed it up nicely in his Wall Street Journal article titled, “The Fed is Increasingly Torn Over a December Rate Cut.” We recommend reading it if you get the chance, but the highlights revolve around his assessment of the different camps beginning to form on the committee.
- Doves (looking to keep cutting interest rates) believe that the labor market has continued to weaken and that the Fed’s interest rate remains in restrictive territory. Using privately generated data, they may cite evidence such as the CGC survey indicating that layoffs increased in October. Inflation, in their estimate, remains well contained. They may cite the Zillow Observed Rent Index, currently signaling minimal growth in rents, as evidence of this trend.
- Hawks (looking to hold interest rates steady) believe that inflation risks remain elevated, particularly by volatile trade policy. It is hard to tell how businesses will absorb the tariffs in the long term, especially if they begin passing costs through to consumers via higher prices next year.
The market remains split on what this will mean in December. At time of writing, the market has the odds at 49.6% for an interest rate cut and 50.4% for holding rates steady. As the fog lifts and data begins to flow, it will be interesting to watch how these odds shift.
As Timiraos wrote, “Some officials view the December and January meetings as largely interchangeable, making the year-end deadline feel somewhat artificial.” Officials may be nonchalant over whether the next cut comes in December or January, but we don’t expect the market to be so unbothered.
