This past Wednesday, the Federal Open Market Committee (FOMC) at the Federal Reserve cut the target overnight lending rate 25 basis points (0.25%). This was as everyone expected. However, Chairman Jay Powell gave investors a jolt when he said another cut in December was “not a foregone conclusion….far from it.”
If that wasn’t enough to get folks’ attention, Powell also gave the markets this tidbit of homespun wisdom: “What do you do when you’re driving in a fog? You slow down.”
How about that? All those academics and intellectuals at the Fed, and the best they can come up with is “we’re driving in a fog”?
Kind of makes you feel all warm and fuzzy, doesn’t it? The answer to that question is no.
However, the Chairman was simply admitting that the Fed is reliant on the government for economic data, just like everyone else. As such, when the Federal government is closed, it isn’t getting all the information it needs to make well-informed decisions.
To be sure, the Fed can generate plenty of material on its own. However, when push comes to shove, it still relies on the Bureau of Labor Statistics (BLS) and the Bureau of Economic Analysis (BEA), at least a little bit.
Imagine being a general devising a battle plan with imperfect reconnaissance. Or a football coach who doesn’t have any game film of the opposing team. That sort of thing.
But how big of a problem is this lack of information for the Fed?
I would venture it isn’t quite the problem Powell suggested it was this past Wednesday, at least not in the short term. If the Fed is more preoccupied with the labor markets than inflation, which arguably appears to be the case, it should have enough data to make decisions. After all, it does a LOT of its own research, plus it can use private sector data from firms like ADP, the Institute of Supply Management, the National Federal of Independent Business, the Conference Board and others.
Essentially, the Fed doesn’t HAVE to rely solely on BLS data — which, in any event, has been notoriously inaccurate recently. It is just another tile in the Fed’s labor market mosaic, or should be.
So, when Jay Powell talks about “driving in a fog,” I don’t believe he is talking about the pea soup I navigated driving up to the Wintergreen Resort in Virginia in the Fall of 1988. That still scares the [heck] out of me.
He must be talking about a foggy morning at the beach, the type that “burns off” after breakfast.
Regardless, the markets didn’t much care for the Chairman’s, shall we say, apparent lack of confidence about the Fed’s ability to make an informed decision heading into the December 2025 FOMC meeting. While it didn’t bother me, I admit it wasn’t a very good look. There are literally trillions of dollars/currency units on the line, and the world’s most powerful central banker says he is in a fog?
Oh well.
Of more interest to me is the true impact that artificial intelligence (AI) is having on the labor markets. That it will forever change our lives and conduct business is inarguable in my opinion. However, is it really to blame for the recent spate of layoff announcements?
Rob Wile and Jared Perlo wrote an excellent column for NBC News yesterday which, in my opinion, summed up the current situation nicely. The following passage from the article quotes a correspondence between them and David Autor at MIT:
“It’s much easier for a company to say, ‘We are laying workers off because we’re realizing AI-related efficiencies’ than to say ‘We’re laying people off because we’re not that profitable or bloated, or facing a slowing economic environment, etc,’” David Autor, a professor of economics at the Massachusetts Institute of Technology, wrote in an email to NBC News.
“Whether or not AI were the reason, you’d be wise to attribute the credit/blame to AI,” wrote Autor, an expert on AI’s impact on workers.
While I have no way of knowing whether Autor is accurate in his assessment, I suspect there is more than a little bit of truth to his contention. What sounds better (if better is the right word) to the investing public? Blaming something as seemingly mysterious as AI or good old-fashioned underperformance?
The hard truth is this: if AI has supposedly and suddenly made a worker redundant, well, they already were and just didn’t know it yet. You see, companies usually don’t lay off their most productive and profitable associates. Technology ordinarily doesn’t replace top-performing workers, it makes them that much better. Nope, and no matter what politicians might say.
In essence, one might, or could, argue AI is less of a true “job-killer” than it is an expediter of the inevitable. If not that, perhaps it is a spotlight on the inefficiencies and lack of productivity of certain positions and/or employees.
I feel as though I live in a glass house and am throwing stones.
Perhaps that is what has the Fed driving in a fog. It might not know the true health of the labor market because it can’t discern “normal” layoffs from those that are AI-driven. If the former, the overall economy could be cooling more rapidly than the official data suggests. If the latter, perhaps the economy has entered a new stage of enhanced worker productivity due to AI — or soon will.
Essentially, if the economy is indeed slowing, more rate cuts could possibly be in order. However, if it isn’t, they might not be. Hmm. For some reason, the old ad jingle “is it live or is it Memorex” came to my mind when I was typing that.
When you throw it all together, the Fed would be struggling with the economic data right now because it IS confusing. There is a lot of weird stuff happening, from tariffs to global discontent to AI. The recent government shutdown, and the lack of timely economic data sets, only compound the craziness.
In other words, it makes the fog that much thicker and, therefore, much more difficult to navigate.
That is what I, and millions of other people, learned this week.
Thank you for your continued support. As always, I hope this newsletter finds you and your family well. May your blessings outweigh your sorrows on this and every day. Also, please be sure to tune into our educational podcast, Trading Perspectives, which is available on every platform.
John Norris
Chief Economist / Chief Investment Officer, Oakworth Asset Management
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