Key Takeaways:

• Difficulty in making interest rate decisions due to data scarcity.
• Diverging opinions among officials regarding the need for further rate cuts.
• Impact of the government shutdown on the availability of economic data.
• Discussion on ending the Fed's balance sheet reduction (QT).

Nick Timiraos, often referred to as the "Fed Whisperer," suggests that the widely anticipated 25-basis-point rate cut is just the beginning. The real challenge lies in determining the next step, especially with the situation complicated by the disruption of crucial economic data due to the government shutdown.

In September, the Fed's concerns about a potentially sharp cooling of the labor market outweighed concerns about high inflation. Fed officials have indicated that their weighing of priorities has not changed significantly since then.

Market expectations for rate cuts have become so entrenched that the focus has shifted to the final meeting in December. Timiraos believes that this week's debate could set the stage for the Fed to remain on hold rather than cut rates again.

In September, a slim majority of officials believed that two more rate cuts might be needed this year, giving the market reason to believe that a rate cut in December is still possible. However, a significant portion of officials felt that it was not appropriate to continue cutting rates after last month.

Typically, economic reports released between Fed meetings help bridge internal divides. But now, especially with the lack of new labor market indicators, officials are missing the information they need to resolve disagreements.

Fed Chairman Jerome Powell stated earlier this month: "From our perspective, we're going to start missing those data. If that continues, they won't be able to collect the data, and it could become more challenging."

The data "pause" may provide Powell with a convenient excuse to avoid questions about subsequent decisions. Former Fed senior advisor William English says that the lack of timely and comprehensive data means "they haven't gotten a lot of new information since September, which probably leaves them still in their September position, just with more uncertainty around that position."

Powell acknowledged that there is no "risk-free path." Officials are caught in a dilemma: either cut rates excessively, stimulating strong economic activity, which could lead to inflation remaining above target; or keep rates unchanged, unnecessarily weakening the labor market.

Timiraos also points out that Fed Governor Michelle Bowman may once again vote against the decision this week, advocating for a larger 50-basis-point cut. However, in the absence of clear data showing a significant deterioration in the labor market, it may be difficult for her to rally committee support for a more aggressive move.

Additionally, Timiraos added that officials may also discuss when to end the reduction of the Fed's $6.6 trillion balance sheet (i.e., quantitative tightening). Many analysts say that given signs that various overnight lending rates have begun to approach the upper end of the Fed's benchmark federal funds rate range, ending the balance sheet reduction makes sense. The current range is 4% to 4.25%.