Rates are Steady without Major Economic News

Rates Steady Amid Government Shutdown

Rates were relatively flat this week and ended slightly improved by Friday. The government shutdown continued the delay in the big economic reports. Markets are trying to determine what is going on in the economy by turning to proprietary and less well-known reports. We did get some interesting Federal Reserve (Fed) updates this week that give us clues to possible rate cut decisions.

ISM Services Index Shows Signs of Contraction

The Institute for Supply Management (ISM) published its Services Index, which fell from 52 to 50, well below market estimates at 54. A number below 50 means the industry is in contraction. ISM Manufacturing has long been under 50, but services, the backbone of the US economy, are now feeling the pain too.

Shutdown Impact Begins Hitting Federal Paychecks

Starting next week, Federal employees will begin to miss paychecks. Active-duty military personnel will miss their October 15 check, and Civilian employees will begin to miss theirs on October 24. Air Traffic Control will get half pay on October 14.  There are 2,000 new ATC employees ready to get started, but there won’t be anyone to train them now. The Congressional Budget Office (CBO) estimates that there are approximately 750,000 furloughed employees, not including the military.

Carlyle Group Forecasts Weak Job Growth

A lessor followed report by the Carlyle Group forecast what the BLS Jobs Report would have shown, but using similar methodologies. They estimate that only 17,000 jobs would have been created in September.That is less than the 22,000 created in August.  

Fed Minutes Reveal Deep Internal Divide

The Fed minutes from the September meeting were released. They confirmed what the Summary of Economic Projections (SEP/Dot Plot) showed:  the Fed is extremely divided in its opinions on the future. While it is clear that two additional rate cuts are virtually certain this year, after that is less so. Compounded by a lack of data due to the shutdown, there is a great deal of uncertainty, which markets hate.

There are clearly two camps at the Fed: the inflation fighters and the job makers. The inflation fighters are very hawkish/hesitate to cut rates but claim the job market is strong. The job makers are less concerned with inflation and are dovish/eager to cut rates to strengthen their perception of a rapidly worsening jobs market. There was also a big discrepancy in where Fed members believe the neutral Fed Funds Rate is. This difference is why some members feel there is more room to cut rates than others.

Fed Chair Race Narrows to Five Candidates

Friday reports emerged from US Treasury Secretary Bessent that the administration had narrowed its list of Fed Chairman candidates from 12 to 5 names. Betting markets are predicting Kevin Hasset as the frontrunner, with Fed Governor Waller not far behind. The process is expected to be completed around Thanksgiving with an announcement before the end of the year. All the candidates are in the clear Dovish/more cuts camp of the Trump administration. Current Chairman Powell’s term as chairman expires in May 2026, but he is also a Fed Governor with a term ending January 31, 2028. He could decide to remain on the board even if he isn’t the chairman. That is a rare move, but possible. 

Interestingly, Danielle DeMartino-Booth provided an interesting insight. She was an advisor to the Dallas Fed President for many years and is an expert on the Fed. She said that under the law, the president appoints the Chairman of the Federal Reserve System. They always act as the Chairman of the Federal Open Market Committee (FOMC) too. The FOMC is the body that actually makes monetary policy decisions, like cutting rates. It is possible for the FOMC to elect a different Chairman of their committee that is distinct from the Chairman appointed by the president. In theory, Chairman Powell could be reelected to Chair the FOMC even if he isn’t the Chair of the Fed.

Looking Ahead: CPI Report May Be Delayed Despite Efforts

Next week’s holiday shortened schedule is still tentative as we don’t know if these reports will all be released due to the shutdown:

Monday, October 13: Markets closed for Columbus Day holiday

Wednesday, October 15: Consumer Price Index (CPI)

Thursday, October 16: Producer price Index (PPI)

Friday, October 17: Housing Starts and Permits

The Bureau of Labor Statistics (BLS) wasn’t going to release the CPI inflation report because of the shutdown. It is being reported that some staff are coming back to prepare the September CPI report, as it’s needed to calculate updates to Social Security that need to be completed by November 1. It is uncertain if it will be released on Wednesday as scheduled or later in the month.