Missing Gov't Data Unlikely to Sway Fed10/29 06:03

   

   WASHINGTON (AP) -- The Federal Reserve is expected to cut its short-term 
rate Wednesday for the second time this year despite an increasingly cloudy 
view of the economy it is trying to influence.

   The government shutdown has cut off the flow of data that the Fed relies on 
to track employment, inflation, and the broader economy. September's jobs 
report, scheduled for release three weeks ago, is still postponed. This month's 
hiring figures, to be released Nov. 7, will likely be delayed and may be less 
comprehensive when they are finally released. And the White House said last 
week that October's inflation report may never be issued at all.

   The data drought raises risks for the Fed because it is widely expected to 
keep cutting rates in an effort to shore up growth and hiring. Fed officials 
signaled at their last meeting in September that they would likely implement 
rate reductions in October and December, and financial markets now consider a 
cut in December to be a near-certainty.

   Yet should job gains pick up soon, the Fed may not detect the change. And if 
hiring rebounds after weak job gains during the summer, further rate cuts may 
not be justified.

   On Tuesday, payroll processor ADP released a new weekly measure of hiring by 
businesses, using payroll data from millions of clients. It shows that in late 
September and earlier this month, companies resumed adding jobs, after shedding 
workers in July and August.

   Still, a key reason rate cuts are so widely expected is that most Fed 
officials see its key rate, which is now about 4.1%, to be high enough that it 
is restraining the economy's growth. Under this view, the Fed can cut several 
more times before reaching a level that might provide unnecessary stimulus to 
the economy.

   Before the government shutdown cut off the flow of data Oct. 1, monthly 
hiring gains had weakened to an average of just 29,000 a month for the previous 
three months, according to the Labor Department's data. The unemployment rate 
ticked up to a still-low 4.3% in August from 4.2% in July.

   Meanwhile, last week's inflation report -- released more than a week late 
because of the shutdown -- showed that inflation remains elevated but isn't 
accelerating and may not need higher interest rates to tame it.

   The government's first report on the economy's growth in the July-September 
quarter was scheduled to be published on Thursday, but will be delayed, as will 
Friday's report on consumer spending that also includes the Fed's preferred 
inflation measure.

   Fed officials say they are monitoring a range of other data, including some 
issued by the private sector, and don't feel handicapped by the lack of 
government reports.

   Also on Wednesday, the central bank may announce that it will no longer 
reduce the size of its massive securities holdings, which it accumulated during 
and after the pandemic and after the 2008-2009 Great Recession. The change 
could over time slightly reduce longer-term interest rates on things like 
mortgages but aren't likely to have a major impact on consumer borrowing costs.

   The Fed purchased nearly $5 trillion of Treasury securities and 
mortgage-backed bonds from 2020 to 2022 to stabilize financial markets during 
the pandemic and keep longer-term interest rates low. The bond-buying lifted 
its securities holdings to $9 trillion.

   When the central bank buys a Treasury note, for example, it pays for it with 
newly-created money that is deposited into reserve accounts banks hold at the 
Fed.

   In the past three years, however, the Fed has reduced its holdings to about 
$6.6 trillion. To shrink its holdings, the Fed lets securities mature without 
replacing them, reducing bank reserves. The risk is if it reduces its holdings 
too far, short-term interest rates could spike as banks borrow money to top-up 
their reserves.

   In 2019, the Fed was reducing its balance sheet and caused a sharp, 
unexpected spike in short-term rates that disrupted financial markets, an 
outcome they want to avoid this time.

   The Fed currently is reducing its holdings of mortgage-backed securities by 
up to $35 billion a month and Treasuries by just $5 billion a month. Powell 
said two weeks ago that the Fed would consider ending the rolloff "in coming 
months," but analysts now expect it to happen sooner because of recent signs 
that banks are running low on reserves.