Fed Flies Blind Into Rate Cut

Government shutdown killed the data, Powell cut anyway, and now nobody knows what's next

The Federal Reserve had just cut interest rates by 25 basis points, bringing them down to 3.75-4.00%. Standard stuff. Entirely expected. Markets had priced it in weeks ago.

But then Powell opened his mouth and torched every assumption Wall Street had been making about December.

Another rate cut is not a foregone conclusion, he said. Far from it.

The probability of a December cut, which had been sitting comfortably above 90%, crashed to coin-flip territory. The dollar surged. Bond yields spiked. Gold tumbled.

And the Nasdaq, because nothing makes sense anymore, hit a record high anyway—propped up by Nvidia becoming the first company to crack $5 trillion in market value.

Welcome to monetary policy in 2025, where the central bank is cutting rates to save jobs while warning that inflation might spiral out of control, all while admitting they have no idea what’s actually happening in the economy because the federal government shut down and stopped publishing data.

Since October 1st, when Congress failed to pass appropriations and the government shut down, the Bureau of Labor Statistics has gone dark. No monthly jobs report. No official inflation numbers. No consumer spending data. Nothing.

The Fed is flying a $27 trillion economy on instruments from the private sector—things like the ADP Employment Report, which is useful but was never designed to replace official statistics. It’s like trying to navigate the Atlantic using a gas station road map.

And yet, they cut anyway.

Why? Because the alternative was worse.

The labor market is softening. GDP growth slowed to roughly 1.5% in the first half of 2025, down from 2.4% the year before. Job gains are decelerating. Unemployment is creeping up. The risk of waiting for perfect information while the economy tips into recession was deemed too high, so the Fed pulled the trigger based on incomplete data and crossed its fingers.

The tariffs are going to keep pushing inflation higher well into 2026.

Trump’s trade war with China has been escalating for months. Tariffs on imported goods create a straightforward supply-side cost that gets passed through to consumers.

Powell acknowledged this in the press conference, promising the Fed is strongly committed to preventing a one-time increase in the price level from sparking an ongoing inflation dynamic.

That’s central banker speak for: worried this thing might spiral and there’s not much anyone can do about it.

Because here’s the dirty secret about tariffs and monetary policy—they work at cross purposes. The Fed controls demand through interest rates. Tariffs are a supply shock. Can’t cure a supply-driven price increase by making it harder for people to borrow money. It’s like trying to fix a broken pipe by turning off the lights.

The framework trade deal announced days before the FOMC meeting—where China agreed to delay rare-earth export controls in exchange for the U.S. backing off 100% tariffs—provided temporary relief.

But temporary is doing a lot of work in that sentence.

The underlying tension hasn’t gone anywhere. Beijing played a game of economic chicken and won concessions by threatening to strangle U.S. tech supply chains.

And now the Fed has to model long-term inflationary risks from trade policy that could reverse on a presidential whim. Good luck with that.

The most revealing part of this entire meeting wasn’t what Powell said. It was the vote count.

10-2.

Two dissents. That hasn’t happened since September 2019.

Governor Stephen Miran wanted a 50 basis point cut. He’s panicking about the labor market and thinks the Fed is moving too slowly. Kansas City Fed President Jeffrey Schmid wanted no cut at all. He’s staring at elevated inflation and thinks Powell is playing with fire.

Both of them have a point. That’s the problem.

Miran is right that the labor market is softening faster than headline numbers suggest. Schmid is right that inflation is still above target and cutting rates while prices are elevated risks destroying the Fed’s credibility.

The fact that the committee is this divided tells you everything you need to know about how impossible this decision was.

The consensus position—the 25 basis point cut—isn’t some masterful Solomonic compromise. It’s the least-bad option in a room full of terrible choices. And it’s inherently unstable. If the data shifts even slightly in either direction, the December meeting could go anywhere from no action to an emergency 50 basis point cut.

Meanwhile, the Nasdaq closed at a record high. Because of course it did.

Nvidia hit $5 trillion in market cap. Microsoft closed above $4 trillion after inking a massive deal with OpenAI. Asian chip stocks soared. Japan’s Nikkei jumped 2.2%. Shanghai cracked 4,000 for the first time since 2015.

Megacap tech stocks have completely decoupled from macro interest rate dynamics.

Investors have decided that AI is going to generate so much future cash flow that moderate changes in the discount rate don’t matter. Whether that’s rational or delusional depends entirely on whether the AI boom turns out to be transformative or just another overhyped cycle.

But the broader market told a different story. The S&P 500 and Dow both hit intraday records, then gave it all back after Powell spoke. The 10-year Treasury yield climbed to 4.07%. The dollar strengthened by half a percent. Gold fell below $4,000 an ounce.

The market doesn’t care about the rate cut that already happened. It cares about the one that might not happen in December.

Congress passes appropriations, the data comes back, and it shows a Goldilocks scenario—labor market cooling but not crashing, inflation moderating but not spiking. The Fed cuts another 25 basis points and calls it a soft landing. Markets rally. Everyone takes credit.

Or.

The shutdown drags on, the data fog persists, and the Fed pauses in December. Powell says they need more certainty before moving again. Markets throw a tantrum. Powell gets blamed for being too cautious. The December meeting becomes a referendum on whether the Fed cares more about inflation or jobs.

Or.

Private sector data shows the labor market is deteriorating rapidly. Unemployment jumps. Consumer spending craters. The Fed panics and cuts 50 basis points in December, possibly in an emergency session. Miran was right. The whole committee pivots toward recession prevention. Markets realize the economy is in worse shape than anyone thought.

Smart money’s on scenario two. Not because it’s the most likely, but because it’s the most politically convenient. The Fed can blame Congress for the shutdown, markets can blame the Fed for being too dovish or too hawkish, and everyone gets to avoid taking responsibility for the underlying reality.

Monetary policy is trying to solve problems it wasn’t designed to fix.