The Fed Is Still Divided on Rate Cuts. This Could Sway the Central Bank.

The probability of a quarter-percentage point cut was at 85% Tuesday afternoon, according to the CME FedWatch futures index. (Kevin Dietsch/Getty Images)

The latest economic data likely won’t change hearts and minds at the Federal Reserve ahead of its December policy meeting.

The Federal Open Market Committee is set to meet Dec. 9-10 to determine the path of monetary policy. Although the CME FedWatch futures index had the probability of a quarter-percentage point cut at 85% Tuesday afternoon, officials’ recent remarks indicate a deep divide.

There is a fierce debate whether the greater risk to economic balance is persistently above-target inflation or a weak labor market. Complicating matters, the data-dependent Fed has been forced to operate on fewer sources of economic information due to the government shutdown.

On Tuesday, some long-delayed data from September were released, but they didn’t provide much clarity.

“The data today I don’t think really will sway anyone in any way, unfortunately,” Citi economist Veronica Clark tells Barron’s. “If anything, you could kind of look at everything we got this morning and say it’s marginally on the more dovish side.”

The producer price index for total final demand rose 0.3% in September, a notable advance from August’s 0.1% decline. But core PPI, which economists and Fed officials tend to prefer, only advanced 0.1% on the month in September—a moderation from the revised wholesale price growth of 0.3% in August and 0.7% in July.

With September data for both PPI and the consumer price index now in hand, economists are estimating the core personal consumption expenditures price index—which excludes food and energy costs—will rise 0.2% month over month in September, though a 0.3% isn’t out of the question. Either way, that is a fairly moderate read, but on an annual basis, core inflation is likely still running at 2.8% year on year.

“That’s not exactly alarming, but it’s also not likely to assuage the hawks,” says Stephen Stanley, Santander’s chief U.S. economist.

September retail sales, meanwhile, only increased at a monthly pace of 0.2% from August to September. That’s notably softer from the 0.6% increase in August from July and below economists’ expectation for a 0.4% jump.

The control group measure—which strips out autos, building materials, gasoline, and restaurant spending and feeds into gross domestic product growth calculations—declined by 0.1% month over month. It suggests lower-and-middle income consumers may be “running out of steam,” writes Mike Reid, senior U.S. economist with the Royal Bank of Canada.

But that comes after a couple months where consumer spending was really strong and it appears that, on average, expenditures will still translate to solid third-quarter GDP growth. The Atlanta Fed’s GDPNow model estimates inflation-adjusted GDP growth was 4.2% for the third quarter, while the New York Fed’s Nowcast estimate of 2.3% is more modest, but still an above-trend result.

“I don’t see this report materially shifting the debate at the FOMC meeting on December 9-10 with the cut camp finding comfort in the inflation readings holding steady and the hold camp seeing potential faster price pressures in input costs and higher frequency inflation rates—as well as the strength in retail sales for the quarter as a whole,” writes John Ryding, chief economic advisor at Brean Capital.

Perhaps the most clear-cut signal in Tuesday’s data was the labor differential, which comes from the Conference Board’s measure of consumer confidence and measures the number of Americans who think jobs are plentiful versus those that feel jobs are hard to get. The share of consumers saying jobs are hard to get edged down to 17.9% in November from 18.3% in October.

So what upcoming releases could change Fed officials’ minds about the economy? The best bet comes in the form of Wednesday’s release of the Beige Book and ongoing data around the number of Americans filing for initial unemployment benefits.

Although the latest Beige Book is expected to again depict muted economic activity across the 12 regional Fed districts, LPL Financial’s chief economist Jeff Roach will be looking to see if there is any shift in businesses’ willingness to eat the cost of the tariffs instead of passing increased prices along to the end consumer. That has helped keep inflation modest and if it continues, could signal the greater risk currently is the very weak labor market, he says.

Any uptick in mentions of layoffs could also be revealing, Clark says. Some Fed officials will be undoubtedly relying on the Beige Book a little bit more this meeting due to the lack of federal data. It will probably have comments about the shutdown, but it also did cover the recent period where there was an uptick in company layoff announcements.

“It’ll be interesting to see if there’s any interesting anecdotes in there because some Fed officials might lean on that a little bit more,” Clark adds.

Weekly jobless claims will also figure prominently as well, particularly because it’s a very timely data set that was still available during the pandemic thanks to state data.

“If anything is really dramatically changing in terms of the labor market getting weaker, we would probably see it there, but they’re not flashing red yet or anything,” Clark says.

Write to Megan Leonhardt at megan.leonhardt@barrons.com