Thoughts on the Market – Fed’s Path Uncertain as Key Data Lags

Date: November 7, 2025
Hosts: Matthew Hornbach (Global Head of MacroStrategy), Michael Gapen (Chief U.S. Economist)

Overview

This episode zeroes in on the Federal Reserve's recent October 2025 meeting, the surprising lack of consensus within the FOMC, and the pressing issue of lagging economic data due to an extended government shutdown. Matthew Hornbach and Michael Gapen dig into what the Fed's actions (and divisions) signal for monetary policy, the U.S. economy, and investor expectations as markets look ahead to 2026.

Key Discussion Points & Insights

1. October FOMC Meeting Outcomes

• Quarter-Percent Rate Cut, Not Unanimous:
  • The Fed delivered a 25 bps rate cut as expected, but the decision revealed a split within the committee.
  • Notably, there were dissenters for both a larger cut (50 bps) and no cut at all.

    “There was a dissent in favor of a 50 basis point cut, there was a dissent in favor of no cut. And that foreshadowed the press conference where really the conversation was about, I think, a divided committee…” — Michael Gapen [00:43]

• Balance Sheet Policy:
  • The Fed will cease reducing its balance sheet earlier than anticipated (now stopping December 1).
  • While this was a surprise in timing, it is not seen as macro-critical at this stage.

2. Fed’s Policy Guidance: No Preset Path Forward

• Powell’s Shift in Tone:
  • Chairman Powell emphasized the Fed’s path isn’t predetermined—future moves will be highly data-dependent.

    “…policy's not on a preset path from here or cut in December is maybe not decidedly part of the baseline or certainly is not a foregone conclusion.” — Michael Gapen [01:22]

• Division within the Committee:
  • One “hawkish” group points to robust economic activity (especially AI investment and upper-income consumer strength).
  • “Dovish” members, including Powell, are concerned with weakening labor market signals and slowing growth.

    “I think the dissents…reflect the tension in the underlying data.” — Michael Gapen [02:47]

3. Data Lags: The Government Shutdown Effect

• Critical Data Unavailable:
  • Key government economic reports are delayed due to a record-long shutdown, impairing Fed and market decision-making.
• Impact on December Meeting:
  • If the shutdown ends before Thanksgiving, enough data may become available for an informed December decision.
  • If the shutdown persists into December, the Fed may act (“lean in the direction of taking one more step”) based on inference that the ongoing shutdown is unlikely to signal a robust economy.

    “…if the government is still shut down in December, I can't imagine the economy is getting better. So I think the Fed could lean in the direction of taking one more step.” — Michael Gapen [04:54]

4. Implications for Markets and 2026 Outlook

• Last Meeting of the Year: Pivotal for 2026
  • Market pricing for 2026 Fed policy hinges on the December meeting’s outcome.
    • If a rate cut occurs: focus shifts to timing of future cuts.
    • If no rate cut: debate pivots to whether further cuts are off the table—or even if a hike could occur later in 2026.
  • The outcome will heavily influence the U.S. Treasury market and investor decision-making.

    “…has that type of importance for markets pricing the path of Fed policy and the path of the economy into 2026.” — Matthew Hornbach [05:22]

• Baseline Economic Outlook:
  • Expect continued private sector pass-through of tariffs keeping inflation sticky in early 2026, with weak labor demand pushing unemployment toward 4.6-4.7%.

    “…demand for labor in the hiring rate will remain low…unemployment rate moving to more like 4.6, maybe 4.7. And that underpins our expectation the Fed will be reducing rates in 2026.” — Michael Gapen [06:34]

  • But, an “Animal Spirits Driven 2026” (momentum, AI spending, fiscal stimulus) could flip this narrative, raising the specter of rate hikes in late 2026 or 2027.

    "...if that is happening, it's not far-fetched to think, well, if the Fed put in risk management insurance cuts, perhaps they need to take those out..." — Michael Gapen [07:36]

5. Investor Sentiment: Glass Half Full or Half Empty?

• Market Conversations Shift:
  • Investor sentiment has turned more optimistic (“glass half full” now vs. “half empty” mid-year).

    “…investors want to see the glass as half full today versus in the middle of this year the glass was looking half empty. And of course as we head into the holiday season, the glass will be filled with something perhaps a bit tastier than water.” — Matthew Hornbach [08:18]

Notable Quotes & Memorable Moments

• On Policy Uncertainty:

  “…the key points, the policy's not on a preset path from here…future cuts are probably more data dependent…”
  — Michael Gapen [01:25]

• On FOMC Division:

  “I think there's one group that's hawkish, one group that's dovish, and I think it reflects the division and the tension that we have in the economic data.”
  — Michael Gapen [01:58]

• On Data Delays:

  “If the government shutdown is ended in the next few weeks…then I think the Fed will have the bulk of the data…If the government is still shut down in December, I can't imagine the economy is getting better.”
  — Michael Gapen [03:49, 04:54]

• On Glass Half Full:

  “As we head into the holiday season, the glass will be filled with something perhaps a bit tastier than water. And so fill my glass please. Indeed.”
  — Matthew Hornbach [08:28]

Timestamps for Key Segments

• FOMC Meeting Recap & Committee Division: [00:08]–[02:47]
• Data Dependency & Shutdown Impact: [03:23]–[05:13]
• December Meeting’s Market Importance: [05:13]–[06:25]
• Rate Path Scenarios for 2026: [06:25]–[08:18]
• Investor Sentiment Reflections: [08:18]–end

Conclusion

This episode adeptly surfaces the immense uncertainty facing Fed policymakers and markets as 2025 closes, largely due to both committee divisions and the lack of fresh economic data caused by the government shutdown. The December FOMC meeting emerges as a decisive moment for U.S. monetary policy and the global investment community as they look to 2026. Panelists encourage listeners to stay nimble and open-minded, as both the economic trajectory and the Fed’s response remain highly data—and shutdown—dependent.