The Post‑Shutdown Reset: How Delayed Data, Rising Yields and Fed Ambiguity Are Rewriting December Rate Odds

Two weeks ago, traders put the probability of a December rate cut above 90%. As of Thursday’s selloff, that confidence faded to roughly 50/50, with estimates in the low-50s according to widely watched futures-implied measures. The repricing accelerated after Chair Jerome Powell cautioned on October 29 that another reduction “is not a foregone conclusion,” a phrase that landed as a clear warning that the bar for further easing had risen.

Fed communications since then have reinforced the sense of division. Several officials—Lisa Cook, Philip Jefferson, Alberto Musalem and Austan Goolsbee—have signaled a preference to proceed cautiously, highlighting the need for a higher bar before delivering more cuts. Boston Fed President Susan Collins and Kansas City Fed President Jeffrey Schmid went further, indicating they’d be highly likely to support a pause given persistent inflation concerns and questions about the labor backdrop. On the other side, Michelle Bowman, Christopher Waller and new governor Stephen Miran have continued to lean in favor of another reduction, arguing that growth risks and emerging labor-market softening warrant more insurance.

The market has translated this split into more bimodal outcomes: either a pause if the Fed prioritizes incomplete data and tighter financial conditions, or a quarter-point cut if incoming private indicators and activity trackers show clearer deterioration. Either way, the days of assuming a smooth glide path lower for rates are over. The base case is now uncertainty.

The shutdown’s statistical damage is unusual and consequential. The White House said it’s unlikely that October’s CPI and employment reports will be released, and while September’s jobs report may arrive with delay, the gap around October leaves a critical blind spot. Powell likened the situation to driving in fog: you slow down. That metaphor now looms over the December decision, where the absence of fresh official data constrains the Fed’s reaction function and suppresses policy conviction.

There are substitutes—ADP private payrolls, company-level announcements, card-spend trackers, online price indices—but none fully replace the breadth, consistency, or methodological rigor of official series. In normal times, policymakers triangulate among multiple sources; in a data drought, the error bands widen. That alone argues for caution and, at minimum, an insistence on clarity from the Fed minutes and any catch-up releases that do materialize.

For investors, the data gap complicates both macro and micro calls. The lack of a verified inflation print for October means term premia and inflation expectations in markets carry more sway in the near term. It also elevates the importance of corporate guidance and high-frequency consumer reads into the holidays, as investors look for on-the-ground confirmation of growth momentum or fatigue.

Thursday’s equity selloff mapped to the repricing in rate expectations. The S&P 500 fell 1.6%, the Nasdaq 2.3%, the Russell 2000 2.9%, and the Dow dropped 797 points—one of the worst days since April. AI bellwethers and high-multiple growth names led the decline as investors dialed back the multiple expansion previously justified by imminent easing. The retreat was broad-based and extended overseas, with Asian markets following through amid pressure on AI-heavy indices and tech supply chains.

Yet the cross-asset signature looked more like a valuation reset than a classic flight to safety. Volatility rose, with the VIX hovering around the low-20s, but Treasuries didn’t stage a decisive risk-off rally. Bond prices were largely steady and the 10-year yield hovered near just above 4.1%, suggesting investors are as focused on term premium and supply dynamics as they are on growth risks. Crypto joined the reset, with bitcoin slipping through the psychologically important $100,000 level, adding to the de-risking tone in momentum assets.

Where does this leave price discovery? Elevated VIX implies wider intraday swings and richer options premiums. Equity-factor performance typically tilts toward quality, profitability, and cash flow durability when policy visibility narrows. In credit, the absence of a dramatic spread blowout indicates conditions are tighter but not disorderly; keep an eye on high-yield primary issuance and real-time bid-ask indicators for early stress signals.

The transmission from the Treasury curve to household finance is visible again. The 10-year Treasury yield sits near 4.11%, and the average 30-year mortgage rate edged to 6.24%, up for a second week though still near this year’s lows. Even modest increases reverse some of the affordability relief that emerged as rates eased in late summer. After two years of elevated mortgage rates, existing home sales remain depressed versus long-term norms, and any renewed firming in long yields risks capping the nascent improvement in housing activity.

Mortgage rates don’t move lockstep with the fed funds rate; they key off term yields and risk premia. Last fall’s counterintuitive rise in mortgage rates after a Fed cut is a reminder that term structure dynamics matter as much as policy moves. In the current fog, the Fed’s caution and unclear inflation trend could keep the long end sticky, especially if supply concerns and term premium reassert.

Tighter financial conditions are a two-way input to policy. If the 10-year drifts higher and mortgage rates firm, the Fed may see that as de facto tightening—supporting a pause even without new data. Conversely, if long yields ease and credit spreads stay contained while private activity measures soften, the case for a modest insurance cut improves. Either way, the housing channel is back in focus as a barometer of how quickly policy—and sentiment—transmits to the real economy.

The reset in U.S. rate expectations reverberated across Asia, where AI-rich markets proved especially sensitive. South Korea’s Kospi and Japan’s Nikkei 225 led declines, with semiconductor and AI-adjacent names bearing outsized pressure. China’s latest industrial data, meanwhile, underscored an uneven recovery, compounding the risk-off tone.

Near term, investors should track four signposts. First, any catch-up releases of September data and clarifications on October’s missing reports—particularly whether any partial inflation updates are feasible. Second, the FOMC minutes for color on the internal debate and the criteria needed to justify a December move. Third, the path of the 10-year yield and the 10y–2y spread, which has re-steepened into positive territory—an important signal that the worst of the inversion is behind us, but not yet an all-clear. Fourth, retail and big-box earnings commentary on holiday demand and consumer health—these will serve as the best real-time proxies for growth resilience in the absence of official data.

Cross-asset risk meters deserve attention: VIX dynamics around the 20–25 zone, credit spreads, and liquidity in both cash bonds and ETFs. A benign scenario keeps volatility elevated but contained and credit orderly; a negative one pairs persistent policy ambiguity with rising long yields and widening spreads.

Scenario A (Pause): The Fed emphasizes the fog. October CPI and payrolls are unavailable, private indicators are mixed, and financial conditions are already tighter via long yields and mortgage rates. The FOMC coalesces around waiting for better visibility, signaling data dependency into January while keeping the door open to resume cuts quickly if labor or inflation data break decisively. Markets digest a higher-for-longer glide path, favoring quality balance sheets, cash generators, and lower beta.

Scenario B (25 bp cut): High-frequency data and corporate commentary deteriorate enough to satisfy the doves without official confirmation. Retailers flag weaker holiday traffic or discounting pressure, private payroll gains slow, and card-spend trackers cool. With the 10-year contained and credit conditions stable, a small insurance cut is delivered, paired with guidance that further moves require corroborating data. Equities rally off the prospect of lower discount rates, but leadership tilts toward defensives and quality until growth clarity improves.

Portfolio implications: Maintain diversified duration exposure with a focus on the belly and long end to benefit from any easing in term yields, while balancing equity beta risk through quality and low-volatility factors. Consider option overlays given richer implieds, and keep dry powder for volatility-driven dislocations. In credit, stay up the quality stack, scrutinize refinancing needs into 2026, and avoid the temptation to chase carry without compensating liquidity. With visibility low, process discipline and position sizing matter more than directional conviction.