The Federal Reserve is scheduled to start its monthly meeting later this week. Participants, but first and foremost is the hope that it will amplify the increasing dangers to their jobs. Against this backdrop of a constantly shifting and difficult economic scene, the Fed’s internal decision-making process has been further muddied by the prospect of continued governmental shutdowns. Market participants are keenly anticipating the Fed’s rhetoric during the statement and Chairman Jerome Powell’s subsequent press conference.
Falling inflation, an unusually tight U.S. labor market — including a yawning labor shortage — further make the case for further rate cuts. On the one hand, the Fed is still living with a large upside risk to inflation that requires some guardedness. As such, Powell needs to walk a very fine line between signaling that they could cut more and not spooking the markets.
Analysts think the Fed’s communiqué will look pretty much the same as September’s. The central bank seems to be signaling that it will only cut rates twice more this year. This would likely be one of two cuts, with the second due in December. Though the absence of updated macroeconomic projections or a dot plot this month interpretively complicate these forecasts.
“There will be no updated macroeconomic projections or dot plot this month.”
The shutdown has only further clouded the waters on a number of economic indicators, preventing the Fed from assessing the true need for future cuts. Consequently, the Fed’s view on future monetary policy has not shifted significantly, given the absence of new official data releases. Futures markets are now fully pricing in 25 basis point cuts for the October and December meetings.
Under this set-up, Powell needs to strike a very open-ended tone. That is the tightrope he has to walk, conveying a “nothing to see here” message, while at the same time acknowledging the risks at play. The Fed’s ability to maintain stability in its communication is crucial, as market participants will rely heavily on Powell’s remarks to gauge the future trajectory of interest rates.
Further complicating matters, market analysts agree that Powell’s got a tough job to do. The fine line he needs to walk might determine how the markets will respond to any future increases in rates. A cut this month, along with a signal of one more reduction in December, would likely be welcomed by jittery investors.
The Fed finds itself at a difficult crossroads today. Throughout 2026, the path of monetary policy will be a toss-up and depend largely on the data we receive. Labor market conditions and inflationary pressures are tightly intertwined. These factors will be critical in determining how the Fed proceeds in the coming months.