“The ongoing U.S. government shutdown has policymakers – and investors – operating without much of the timely official data that usually inform their decisions. This could have a tangible impact on Federal Reserve policy in particular: Without crucial information on inflation and labor markets, the Fed could take a more cautious approach to interest rate moves while it awaits more clarity on the state of the U.S. economy. A detailed review of the transcript of Fed Chair Jerome Powell’s press conference following last week’s Fed meeting suggests that the longer the shutdown drags on, the more the probability of a December rate cut diminishes, and January becomes more likely. Our base case is that the Fed will cut its policy rate at one of those meetings, bringing it to a range of 3.5%–3.75%. Beyond that, we believe it’s possible the Fed will pause at least until Powell’s term as Fed chair ends in May, as fiscal stimulus, including tax cuts and credits, supports the economy more forcefully in the first half of 2026. After that, the Fed could resume rate cuts in the second half of 2026 – assuming inflation is more clearly returning to the central bank’s 2% target, tariff effects fade, and risks to labor markets persist.”
Morten W. Langer
