Federal Reserve Faces "Cut-off" of Data

On October 22nd Eastern Time, renowned financial journalist Nick Timiraos, known as the "Fed Whisperer," reported that according to informed sources, payroll services provider ADP Research has stopped providing the Federal Reserve with employment data covering approximately 20% of the U.S. private sector workforce. This occurred on August 28th, and Fed Governor Waller had previously cited this data in a speech.

ADP did not respond to media requests for comment. The immediate reason for this "cut-off" remains unclear.

ADP stated that the company has historically provided aggregated administrative data (not client data) to the Federal Reserve free of charge as a public service. "We are actively collaborating with the Federal Reserve to ensure processes are improved to share this valuable information in line with our strict standards."

Due to the U.S. government shutdown, federal statistical agencies have largely halted the release of economic data. The interruption of ADP data further weakens the Fed's real-time grasp of the job market. The Federal Reserve is scheduled to hold its interest rate meeting on October 28-29. The current policy dilemma lies in the fact that while the labor market has clearly weakened, core inflationary pressures have not fully subsided.

The Federal Reserve's data framework relies on official data, third-party surveys, and internal models. The data-sharing relationship between the Fed and ADP has been public for years. Recent Fed policy meeting minutes from 2023 still included generalized descriptions of the Fed's analysis of ADP data, similar to Waller's August speech.

Fed Chair Powell first publicly disclosed the Fed's collaboration with ADP in a 2019 speech. Powell explained how Fed economists developed a method using the underlying data to predict the official employment growth figures reported monthly by the Bureau of Labor Statistics, including revised data.

In the 2019 speech, Powell stated that if the Fed had access to ADP data in 2008, policymakers could have detected the economic deterioration earlier than government data suggested. During recessions, official data are often revised down retrospectively to show weakness that wasn't apparent in the real-time data.

According to informed sources, Powell has attempted to persuade ADP to resume data sharing, but these efforts have so far been unsuccessful. The data gap could take on new significance following the government shutdown, which led statistical agencies to furlough staff and suspend most data releases for this month starting October 1st.

Rising Expectations for Interest Rate Cuts

Despite the lack of economic data, market expectations for further Fed rate cuts are continuously heating up.

A Reuters poll of economists shows that the Fed will cut rates by 25 basis points next week and again in December.

Among 117 economists surveyed, 115 except for two predicted the Fed would cut rates by another 25 basis points on October 29th, bringing the interest rate to the 3.75%–4.00% range. Two others expected a 25 basis point cut in October and a 50 basis point cut in December.

According to CME's "FedWatch Tool," as of 08:30 Beijing Time on October 23rd, the probability of a 25 basis point rate cut by the Fed in October is 96.7%, while the probability of holding rates steady is 3.3%. The probability of a cumulative 50 basis point cut by December is 96.5%, while the probability of a cumulative 75 basis point cut has fallen to 0.2%.

Julia Coronado, founder of MacroPolicy Perspectives, said that a Fed rate cut in October is a "done deal," and nothing can change the view that downside risks still exist in the labor market.

Additionally, strategists at TD Securities stated: "We expect the Fed to announce the cessation of balance sheet runoff at its October policy meeting. The balance sheet is likely to remain stable for a period, but if year-end pressures are too great, it might prompt the Fed to restart Treasury purchases in 2026 to inject liquidity into the market."

There remains significant disagreement among surveyed economists regarding the interest rate level by the end of next year. Economists provided seven different forecasts, ranging from 2.25%–2.50% to 3.75%–4.00%. Part of the reason for the increased uncertainty is market speculation about who will succeed Chair Powell after his term ends in May next year.

Among 33 economists who answered an additional question, 76% (or 25 people) believed that the greater risk to the Fed's interest rate policy at the end of this monetary policy cycle is pushing rates too low.

For months, U.S. President Trump has been pressuring Powell to cut rates significantly.

"The risk is that there could be more cuts next year," said Brett Ryan, senior U.S. economist at Deutsche Bank. "The risk of Fed independence being compromised is higher compared to any prior administration."