Data-Starved Fed Set to Cut Rates in December?

In just a few weeks, the Federal Reserve’s Open Market Committee (FOMC) will re-convene to make a critical decision for the end of 2025…

Should they cut interest rates to stoke economic activity? Or should they hold steady to wait and see how things play out?

Normally, they’d be feverishly parsing through mountains of official data to make their decision. But this time around, they won’t have a very large sample size. Maybe they’ll get a few weeks of useful data from the Bureau of Labor Statistics (BLS) now that the shutdown is ending — but that’s it.

Fortunately, there’s plenty of “unofficial” data out there too. And it’s giving us a very clear picture of what to expect and whether rates should be cut. Here’s what I expect the Fed will do:

Video transcript:

Welcome to Moneyball Economics. I’m Andrew Zatlin, and we are again facing another critical moment for the stock and bond markets In a few weeks.

On December 9th, the Federal Reserve is going to meet again and they’re going to talk about interest rate cuts again. And the consensus right now is getting a little wobbly.

If you were sitting here two months ago, even the consensus was definite guaranteed, a hundred percent rate cut. Standing here today, however, it’s a one third, two third split where one third of the market thinks there will be no rate cut. And the reason is twofold, partly because the economy still seems pretty resilient and mostly because quite frankly, the Fed doesn’t have any data to consider.

That’s right. Six weeks into the government shutdown, there’s been no data for the Fed to chew on, no input that they can then crank on and get the output decision.

And so a lot of folks are thinking maybe the Fed, which loves to say they’re data driven, takes a position that, look, we don’t have enough data to make a decision.

And so as a result, we’re not going to, we’re going to wait. We’re going to push it out to say a January or February meeting when we’ve got a little bit better sense of what’s going on. And let’s face it, Powell’s on the way out and he’s more than willing to pull a move like that.

So option one is they kick the can.

Well, today I want to share with you what I’m sharing with my hedge fund clients about why, number one, I think the Fed’s going to make a decision, and number two, why I think it’s going to be for another rate cut.

I’m not saying it’s the right reason or the wrong reason.

I’m just trying to reverse engineer the Fed’s thinking right off the bat, data-driven, fed.

Well, if we assume that they have conventional data only, they don’t make a decision. But we already know based on some of the things that some of the Fed governors have shared, that they are already considering alternative data.

Go back to the summertime, the BLS tragedy where payrolls looked ridiculous and Trump fired the director of the BLs for not being able to pull in data. The Fed has been spending some time looking at non-conventional data, let’s put it that way. And they’re looking specifically, they’ve said at ADP payroll data and indeed job postings data. So in essence, what the fed’s trying to do is get a handle on where we are now. That’s the ADP data and where we’re going, that’s indeed data. That’s job postings data, that’s intent to hire data.

And that tallies with the traditional data points that they’re currently not getting. For example, jolts data, the job openings, layoffs, that data comes out, and indeed.com has a really good history of correlating to that data point. So it’s a good proxy. So the Fed could stand strongly and say, we are getting visibility to the future demand for labor.

As for looking at payrolls, well, they can’t. But again, ADP has some payroll data and in fact there’s an argument that maybe ADP data is more reliable, not less reliable. Let’s talk about this because if you look at both signals, they’re going to say labor market’s soggy, and that means the Fed is going to be inclined to do a rate cut off on the side.

My data says it’s not that soggy at all, and we’ll talk about the differences. But for right now, let’s just zone just zero in on what is the Fed seeing and what decision will that lead them to?

Well, you notice I haven’t mentioned inflation.

Again, we don’t really have a lot of inflation data, but it seems pretty clear that at least based on producer information like the PMI information, ISMs, PMIs, that really there’s no price strength right now. There is some pass through of the higher tariff costs, but in general, inflation is not really the issue du jour.

And so, as a result, the Fed might sit there and say, it’s not about inflation anymore. The tariffs haven’t really bled into driving up inflation. Instead, it’s about the labor market.

So step one, is the Fed going to make a decision? I think yes, if the Fed makes a decision, what data are they going to prioritize? And I’m saying they’re going to prioritize labor data, and that’s great because let’s face it, I am Mr. Labor. And in addition to that, I focus on a lot of alternative data sets.

So I’m exactly where the Fed’s going. What does the labor data say the Fed’s looking at? That’s where we really want to spend some time.

ADP, they are the payroll producers for about 15% of the country. They’re the folks who are basically taking the tickets at the stadium. They know how full or how empty the stadium is. And lately they’ve been producing some data on a weekly basis, and that data says, Hey, for the month of September, things were good.

We had employers leaning in and hiring quite a lot, not at the 200,000 payroll level, but good levels, good enough to justify a rate cut of some size, not low enough where it was a panic, not high enough where it would create some kind of problems. A Goldilocks number below a hundred thousand. Well, fast forward to October and they’ve come out and said, oh no, no, things have reversed.

We’ve seen a massive drop. So if you’re the Fed and you’re looking at where we are today, you’re going to see a little rise a down. You’re basically going to see this up, down, up, down motion that says the labor market really isn’t strong. It goes up a little bit, it goes down a little bit. We should be thinking rate cut. Now that’s for today. What about going forward?

And again, that brings us to indeed.com data indeed.com. Strong correlation to future job postings Indeed is saying, wow, things are really soggy. Employers are not posting jobs. Combine them, the messages to the Fed are not really a strong labor market.

Now, off on the side, the jobless claims data is going to look pretty robust. So we’re going to have starting next week, I believe jobless claims data coming out and it’s going to look pretty benign.

Well, I think the Fed’s going to look at the jobless claims data and they’re going to disregard the jobless claims data and they’re going to overweight the payroll data, payroll data in the sense of how many payrolls is a ADP processing payroll data in the sense of and going forward, how many new jobs are probably going to be added? That’s the indeed data, and that’s looking soggy.

Let me explain though to you, what’s really going on. This is the truth, and I don’t think the fed’s going to get to the truth. So that just means that soggy labor data rate cut in December, but off on the side, you’re going to be getting from me a slightly well significantly different set of ideas, shall we say. See the problem with indeed.com data, and let’s just start there. They are doing job postings on behalf of other companies.

And guess what?

During COVID, this was a primary way for companies to reach out and get the people they needed. Remember, during COVID, there was a mad scramble to hire anybody and everybody.

And so you had companies like indeed.com as a great alternative platform to get job seekers, get employers together as a great marketplace. But what they would do is they would go to a company say like a meta, and they’d say, look, you need to post X number of postings. We’re not going to charge you per person.

We’re going to do a fee, just an annual fee, and let’s call it a million dollars, just making up numbers here. So a million dollars a year gives you the right to post however many postings you want and we’ll renew. And guess what? In your meta, your Facebook, apple, you’re trying to hire a lot of people and you think that’s going to continue.

So these guys come to you and say, look, it’s a million this year, a million and a half next year, 2 million from now. What if we cut a long-term deal with you and we’ll say, do a three-year agreement with us, guaranteed payments, and you get as much as you want in terms of postings. That’s the business model for a job posting site like monster indeed.com and so forth.

But here’s the problem that isn’t reflecting today’s reality. In today’s reality, these companies don’t need to rely on job postings boards.

Why? Because there are more people looking for work. That’s right. Today, all these companies can use their own in-house job posting boards. You want a job at Apple? Just go to Apple. You don’t need to go through indeed.com. And as a result, as these agreements, these long-term agreements have started to come to renewal time, they’re not getting renewed.

That means to net it out, employers are no longer relying on indeed.com to get their hires, and as a result, they’re not posting as much or paying as much to indeed.com. And so the net result is indeed.com is saying, wow, the job market’s soggy because we’re not getting as many job postings when in fact, the reality is they’re not getting as many job postings because employers no longer need them. So just be cautious a little bit whenever you hear about indeed.com data.

But the reality is I think the Fed gets down to this level, they’re just going to take it at one dimension. Job postings going down. So let’s talk about ADP data. Now, this is a little bit more interesting because ADP is saying, Hey, stuff went south in October. We saw a lot of payrolls drop. The problem is this is a new data set.

ADP just started doing this because there’s a demand for this kind of data right now going beyond the government, and especially if you think the Fed’s watching you. So ADP is out there putting out data and they’re saying, Hey, as of October, things really went to hell in a hand baskets except if you run their numbers, they’re basically saying there was about 60 to a hundred thousand people who lost their jobs in three weeks in October.

And that’s a problem because in order to have that huge number of cuts, well, you’d see it showing up in jobless claims, which it hasn’t been happening at the state level data that is available. So it’s not materializing. Also, typically speaking, you’d have to have what are called worn, WARN notices, which say, Hey, guess what? Intel are going to be firing 10,000 people. And again, that’s not happening.

What has happened is one of two things. One, the federal government workers who were on the payrolls until October 1st and are now no longer working for the federal government, that’s what’s really showing up.

And unfortunately, ADP isn’t segmenting out how many of this job dissent is coming from the private sector and how many is coming from the public sector because entirely two different things entirely. Two different impulses. If you’re the Fed and you see that in fact the private sector is pretty robust with jobs, you’re going to make a different decision than if you see this big number that’s negative.

So be careful with the ADP data, and I don’t think the fed’s really being careful with it. And I mentioned there are two reasons why this ADP data could be reporting softness. One is they’re lumping in the federal government workers who are let go October 1st, these buyouts.

The other is we’ve got a lot of farm workers and a lot of construction workers who are seasonally getting released. And so this would be normal. You wouldn’t see a warn notice for these workers, seasonal temporary workers, not full-time workers.

And it’s possible, again, like with the federal workers that ADP doesn’t yet have experience in knowing how to seasonally adjust. And so I’m not sure I trust the ADP data at face value, but again, I’m not the Federal Reserve. I’m not buying into what they say hook, line and sinker, but the Fed is. And so I believe going forward, you’re going to see some soggy jobs data.

The fed’s going to make that cut, and then we’ll come back in the new year if the cut happens, expect the bond market to take off. Expect the stock market to take off because again, it’s not a pronouncement that the economy’s bad. It’s simply a pronouncement that the economy’s not doing great and a rate cuts justified not panic. It’s a Goldilocks number low enough to justify a rate cut. Not high enough to compel the Fed to withhold.

We’re in it to win it, folks.

Zatlin out.