The prolonged US government shutdown has plunged the Federal Reserve into a "data fog," leaving its December rate decision hanging in the balance.

Following the latest policy meeting, Fed Chair Jerome Powell reinforced market caution. Trading desks note that reports from Citi and Morgan Stanley indicate Powell abandoned his prior dovish stance, firmly stating a December rate cut is "far from certain."

He likened the data drought to "driving in fog," bluntly asking, "What do you do when driving in fog? You slow down." Markets interpreted this as a clear signal: missing data may force the Fed into greater caution.

With the shutdown delaying critical economic releases, the data-dependent Fed faces mounting uncertainty. Wall Street remains divided: Morgan Stanley argues longer shutdowns reduce cut odds, while Citi expects a resolution within two weeks and a December cut.

**Navigating the "Data Fog"** Powell’s metaphor underscores the Fed’s policy dilemma. Morgan Stanley’s report highlights his press conference shift toward a "no preset path" stance, emphasizing reliance on data—a hawkish pivot despite announcing a 25bps cut.

Citi’s Andrew Hollenhorst team suggests Powell’s tough talk may aim to bridge internal Fed divisions. Still, his warning is clear: amid extreme uncertainty, the Fed will "proceed carefully." Notably, the Fed also announced ending quantitative tightening (QT) by December 1, seen by some as dovish hedging.

**Shutdown Duration Dictates Decision Framework** How long the shutdown lasts directly shapes the Fed’s data access. Morgan Stanley’s scenario analysis, led by economist Michael T. Gapen, models outcomes based on 2013’s shutdown:

1. **Early November resolution**: The Fed would likely receive three employment reports (Sept–Nov) and key September/October CPI and retail data—sufficient to justify a cut. 2. **Mid-November resolution**: Data would be "more limited," possibly only September jobs, retail, and inflation. State-level and private metrics might fill gaps, keeping a cut feasible. 3. **Post-Thanksgiving resolution (late November)**: The worst-case scenario. The Fed might only get September CPI/jobs reports, with retail data at risk. A "data vacuum" could force a December pause unless state/private indicators deteriorate sharply.

Simply put: longer shutdowns lower cut odds.

**Citi: Shutdown Could End Within Two Weeks** In contrast to Morgan Stanley’s caution, Citi strikes an optimistic tone, expressing growing confidence in a two-week resolution. The report cites critical pressure points: - **SNAP benefits halted** November 1, affecting 42 million Americans. - **Military pay crisis**: Funding for troop salaries is nearing exhaustion. - **Political catalysts**: Upcoming local elections may break the deadlock.

Citi predicts rapid data releases post-reopening, giving the Fed "up to three employment reports" before December—enough to proceed with its baseline forecast: 25bps cuts in December, January, and March.