Is the Economy Getting Better or Worse? The Fed Says It's Hard to Tell

Speaker 2 Yesterday, the Federal Reserve announced that it was cutting interest rates again by a quarter of a point.

Speaker 2 But big whoop, everybody knew that was coming. What people are really dying to know is what the Fed will do next.

Speaker 1 Interest rate policy isn't just about what the Fed does at the meeting. They cut interest rates or they raise interest rates.

Speaker 2 That's our chief economics correspondent, Nick Timuros.

Speaker 1 It's about what they say is the most likely path forward. Markets price that in.
The bond market reacts to that. Financial conditions change because of what they expect the Fed to do.

Speaker 2 Nick, it seems like every time we have you on the show, you come up with a very useful metaphor for what is going on at the Fed. So what is the metaphor that you have for us today?

Speaker 1 Well, so the metaphor I would use is the one that Jay Powell, the Fed chair, used yesterday.

Speaker 1 They are driving in the fog right now because of this data blackout that resulted from the government shutdown.

Speaker 2 You could imagine that, you know, what do you do if, what do you do if you're driving in the fog? You slow down. So

Speaker 2 that could or could not. I don't know how that's going to play into things.

Speaker 2 For the Federal Reserve, the government shutdown has made the road ahead really hard to see.

Speaker 1 For the last month, they have not had access to the high-quality economic statistics they use to calibrate their policy decisions.

Speaker 2 It's like driving in the fog with a GPS that has no signal.

Speaker 1 Driving in the fog, your GPS is out, your speedometer is not working.

Speaker 2 The gaslight is on, maybe.

Speaker 1 Well, and you're always sort of not sure if the readings are right, if the visibility is what you think it is. You know, you look in the rearview mirror, objects may be closer than they appear.

Speaker 1 There's always that element of uncertainty when you're setting monetary policy.

Speaker 1 But the government shutdown is just plain unhelpful to the Fed here because they were already sort of in this weird position of inflation's moving away from where we want it to, but the labor market might be slowing.

Speaker 1 So, when your two goals are telling you to go in different directions, you know, that was already a challenging situation. And Powell basically said that yesterday.

Speaker 1 So, it just, you know, it's just one more problem.

Speaker 2 It sounds like a precarious situation.

Speaker 1 Yes, it's very delicate.

Speaker 2 Welcome to The Journal, our show about money, business, and power. I'm Ryan Knutson.
It's Thursday, October 30th.

Speaker 2 Coming up on the show, the fog hanging over the Fed and what that means for the economy.

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Speaker 2 There are two boogeymen lurking in the economy right now. There's inflation, which at around 3% is higher than what the Fed wants, and there's a weakening job market.

Speaker 2 Inside the Fed, there's a debate raging about what to do about those two boogeymen. Lower interest rates to stimulate the job market or keep them steady to fend off inflation.

Speaker 2 So heading into the Fed's meeting this week, which side seemed to be winning out?

Speaker 1 Well, the slowdown in job growth this summer got a lot of attention, including from the Fed, including from the Fed chair.

Speaker 1 So if you go back to the end of July, the Fed did not cut interest rates at that meeting. Powell came out and said, look, the labor market, it seems all right.

Speaker 1 And then two days later, on August 1st, the July jobs report was very very soft. There were revisions to job data in the end of the summer that said we didn't add as many jobs as we had thought.

Speaker 1 And so that's telling you maybe this solid labor market that you've been pointing to is a reason you didn't have to cut rates.

Speaker 1 That argument sort of faded a little bit and it got people ready to cut interest rates. So they cut in September, they cut in October.

Speaker 1 But once you've done that, it pulls forward this other question of, well, where are you going to stop?

Speaker 2 And so as this debate is playing out, then enter the government shutdown and the loss of data that came as a result of that.

Speaker 2 Can you first explain what data does the Fed normally get and what data does it normally rely on as it would be considering this kind of a policy change?

Speaker 1 Well, the two big ones are the labor market report that we get the first Friday of every month.

Speaker 1 That has monthly job growth, it has the unemployment rate, which is really important because the unemployment rate will kind of cut through the noise of is it demand that's falling or is it supply that's falling?

Speaker 1 And then you get the inflation numbers at the middle and the end of every month.

Speaker 1 We did get the September Consumer Price Index report a little bit later than usual, but the government brought back workers to produce that. But the labor market data

Speaker 1 is on pause.

Speaker 2 So if the Fed doesn't have government data and it's driving in this fog, what can they look at? What else is out there?

Speaker 1 There's this payroll processing firm ADP, which does a good job of,

Speaker 1 they provide payroll services for 20% of private workers so they can tell

Speaker 1 what's happening to hours worked, employment, wages, that sort of thing. There's surveys, there's anecdotes that the Fed collects through their 12 reserve banks before every Fed meeting.
But,

Speaker 1 you know, the problem with anecdote is that it can be kind of squishy.

Speaker 1 Just this week, for example, Visa reported earnings and they were good. And they said, you know, spending is solid.
Retail sales are chugging along.

Speaker 2 Visa, the credit card company, they also see what people are spending their money on. They're saying people are still spending.

Speaker 1 But then on Wednesday, you had Chipotle,

Speaker 1 which is sort of seen as a bellwether for the middle-income consumer. And they've downgraded their sales forecast, I think, three quarters in a row now.

Speaker 2 Trevor Burrus, Jr.: In other words, people are skipping the guac.

Speaker 1 Yeah, there's just people are sort of conserving more. So I think that kind of highlights the problem with going on anecdote is you can sort of find the news to fit your view.

Speaker 1 If you have some government data, something that's a little bit more 30,000-foot view, it can help put in context if this is idiosyncratic or if this is because actually under the hood of the economy, things are not looking so good.

Speaker 2 Aaron Powell, so as if the shutdown drags on longer, does the data problem get worse?

Speaker 1 Aaron Powell, Yes. The data problem gets worse in part because

Speaker 1 there are questions as to whether the reports for now, October, will even get produced. What the government data wizards do is they survey businesses about price changes.

Speaker 1 And if if they're not working for the month of October, you know, are you going to go back and do the October report or are you just going to skip it and move on to the November report?

Speaker 2 So what is the sort of anecdotal piecemeal data that the Fed has? What is that showing about the labor market?

Speaker 1 Well, so what Powell said yesterday was that the data that they've received since their last meeting, most of which occurred in a period where they weren't getting the government data, hadn't really changed the outlook.

Speaker 1 The consumer spending numbers had been pretty solid. They continue to look pretty solid.

Speaker 1 That's actually one of the big mysteries right now in the economy: you have consumer spending that looks all right, but a labor market that's slowing down.

Speaker 1 And there's always a question of which one of those is going to catch up to the other.

Speaker 1 Is the weaker labor market going to move stronger to reflect where consumer spending is, or is a weaker labor profile, people making less money, fewer people working,

Speaker 1 labor income going down, would suggest consumer spending is going to sort of track down to that?

Speaker 2 Right. Is all this consumer spending going to lead to an improvement in the job market? Or is the weakness in the job market going to pull down the consumer spending?

Speaker 1 Exactly right.

Speaker 2 So Fed officials are taking all this baggage into their meeting yesterday. What's your sense of how that meeting went as the Fed officials are meeting to decide which direction to steer the economy?

Speaker 1 Well, it sounded like a contentious meeting. The Fed chair doesn't always come out and say there were strongly differing views.

Speaker 2 What does a tense Fed meeting look like? I mean, are people getting up, you think, and slamming tables and shouting?

Speaker 1 The Fed is not a slamming tables and shouting place.

Speaker 1 You know,

Speaker 1 it's much more like an academic seminar. People are presenting.

Speaker 2 That's a great point, sir, but I beg to differ.

Speaker 1 Yeah, yeah, that's right.

Speaker 2 After that civil debate behind closed doors, Fed Chair Jerome Powell held a press conference, and he was unusually blunt.

Speaker 2 The debate over which boogeyman is worse-stubborn inflation or a weakening job market-is not even close to being settled. That's next.

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Speaker 2 Good afternoon.

Speaker 2 My colleagues and I remain squarely focused. So yesterday, Powell comes out into the press room, gets behind the podium, faces this room of reporters.
You're there. Where were you sitting?

Speaker 2 And what was the vibe like in the room?

Speaker 1 Well, we're usually packed in pretty close quarters. There are a lot of reporters who want to go to the press conference.
So I'm sitting there kind of at the edge of the front row. And

Speaker 1 when I go to the press conference, you always have an idea of what you might ask, but you're also listening to what he's saying in those opening remarks, which are very carefully calibrated.

Speaker 2 And one of the first things Powell talked about was that big question we mentioned earlier, which is, what is the Fed going to do at its next meeting in December?

Speaker 2 Is it going to keep cutting rates or not?

Speaker 2 In the committee's discussions at this meeting, there were strongly differing views about how to proceed in December.

Speaker 2 A further reduction in the policy rate at the December meeting is not a foregone conclusion, far from it.

Speaker 2 Policy is not on a preset course.

Speaker 1 So when he comes out and says December's not a foregone conclusion, far from it, I said, okay, let's follow up on that.

Speaker 1 Nick Timrose of the Wall Street Journal. Chair Cowell, are you uncomfortable with how market pricing has assumed a rate cut is a foregone conclusion at your next meeting?

Speaker 2 Well, as I just mentioned,

Speaker 2 a further reduction in the policy rate at the December meeting is not a foregone conclusion, as I've just said.

Speaker 1 He said, let me make clear, December is not a foregone conclusion, far from it. And he didn't have to do that.
And he doesn't usually do that.

Speaker 1 He normally says something more vague and bland, like it's the equivalent to the

Speaker 1 pilot giving the routine safety briefing that nobody listens to, everybody ignores. ignores.

Speaker 1 And he even said later, he repeated the line later during the press conference, and he said, I know I always sort of give this disclaimer, but this time I really mean it.

Speaker 2 What did Powell say about why his tune has changed a little bit about the December meeting? And why is he throwing more cold water on the idea that there could be more rate cuts?

Speaker 1 Well, I think clearly there's a larger group around the table that doesn't want to do that. Powell said at one point there was a growing chorus of officials who had more reservations.

Speaker 2 Look, everybody on the committee is deeply committed to doing the right thing to achieve our goals, maximum employment and stable prices. You have differences on how to do that, as I mentioned.

Speaker 1 And one of the questions I have is, is that a growing chorus in terms of the number of people who are joining or in the volume of the people who are already there?

Speaker 1 You already had a clear minority of people who were reluctant to cut, and are they getting louder or are other people around the room joining them?

Speaker 2 so we talked about how there's two camps at the Fed: one that's pushing a more cautious approach on cutting interest rates because they're concerned about inflation, the other is more concerned about the labor market.

Speaker 2 There's another actor here, which is President Trump, who we talked a lot about the last time you were on the show, who has made no secret that he wants to cut interest rates.

Speaker 2 And he's also been trying to exert more influence over the Fed. Were you seeing any of President Trump's fingerprints or influence on the Fed at this most recent decision?

Speaker 1 Not really.

Speaker 1 Where you're seeing a greater effect from President Trump's more belligerent stance towards the Fed is it's reflected in market expectations of what the Fed is going to do in the second half of 2026.

Speaker 1 Why is that? What's happening in the second half of 2026? There's going to be a new Fed chair. Jay Powell's term ends in May.

Speaker 1 And so you can see in interest rate futures markets, you know, there had already been expectations that the Fed would cut a couple of times before the end of Powell's term.

Speaker 1 But then there were expectations the Fed would resume or cut a little bit more after that. And so,

Speaker 1 you know, the market's assuming that the president's going to put somebody at the Fed who's going to deliver more rate cuts.

Speaker 1 What happened this week was whether it was deliberate or not, and I really don't know, I'm not trying to imply that it was, but this is a way for everybody to see here that this isn't monetary policy being set alone by one person.

Speaker 1 There are 12 people who decide on this, and a new Fed chair isn't just going to get interest rate cuts because they say that's what we should do here.

Speaker 1 You're going to have to persuade people with the data, with the evidence, with intellectually consistent arguments.

Speaker 1 And if you can't do that, then we're going to have a very interesting situation next year because we've never seen a Fed committee that goes against the chair, that doesn't do what the chair wants.

Speaker 1 Fed dissents happen, but there's rarely more than two.

Speaker 1 So, if you were to get into a situation where you're having many dissents,

Speaker 1 which it seems possible now that you have these divisions, that's sort of a wake-up call here: that monetary policy isn't set just by one person.

Speaker 2 That's all for today. Thursday, October 30th.
The journal is a co-production of Spotify and the Wall Street Journal. If you like our show, follow us on Spotify or wherever you get your podcasts.

Speaker 2 We're out every weekday afternoon.

Speaker 2 Thanks for listening. See you tomorrow.

Speaker 2 Nick, do you have your Halloween costume picked out?

Speaker 1 My kids do.

Speaker 1 I don't.

Speaker 2 You're not going to go as

Speaker 2 maybe like a dead jobs report or something?

Speaker 1 I was going to go as Shohei Otani, but it's not as scary after the last couple nights, so.