Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street succumbed to a tech-led selloff on Tuesday, slammed by warnings of a market pullback from top U.S. bank CEOs and a steep slide in AI darling Palantir , while the dollar continued its climb and Treasuries drew some safe-haven demand.  

In my column today, I look at deepening splits at the Fed, and how the polarization of opinions on where rates should go pose a major test of consensus-builder Jerome Powell's leadership and skills of persuasion.  

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* U.S. government shutdown matches record

The government shutdown entered its 35th day on Tuesday, matching a record set during President Trump's first term for the longest in history. Food assistance for the poor has now been halted, federal workers across the spectrum are going unpaid, and airspace in certain parts of the country may soon be shut down.

At the macro level, the CBO estimates an eight-week shutdown will reduce Q4 annualized real GDP growth by 2 percentage points, although much of that will be recovered. Meanwhile, the Fed is flying blind owing to the economic data drought. You can see why investors might want to take some chips off the table.

* Wall Street and a democratic socialist mayor?

 New York City chooses its next mayor, most likely Zohran Mamdani, a 34-year-old Muslim democratic socialist who has pledged to hike taxes on people making over $1 million a year and raise corporation tax. According to the Empire Center think tank, Mamdani's income tax hike will affect about 1% of filers, and the corporate tax hike would affect about 1,000 of the city's 250,000 businesses.

Wall Street heavyweights Bill Ackman and Dan Loeb have warned that Mamdani will be a disaster for New York. Others have warned the rich will leave the city and take their money with them. Online prediction platform Polymarket puts the probability of a Mamdani win at 95%. 

* British budget blues

Tax rises in Britain are coming. In a speech on Tuesday ahead of the annual budget later this month, Chancellor Rachel Reeves warned of the "hard choices" she faces to protect public services, avoid austerity, and bring down the national debt.

One of Labour's main election pledges last year was not to raise any of the major taxes, so Reeves is in a difficult spot. Investors aren't particularly impressed, and sterling slumped - growth might suffer and the BoE may be forced to offset tighter fiscal policy with looser monetary policy.

Disagreement and dissent among the Federal Reserve's 19-strong monetary policymaking committee is deepening as the fog of economic uncertainty thickens, putting Chair Jerome Powell's consensus-building skills to the ultimate test.

The Fed's decision last week to cut interest rates was unexceptional, but the meeting was historic. The 10-2 vote to cut rates by a quarter of a percentage point was only the third time since 1990 that voting Fed members dissented in favor of both tighter and looser monetary policy. Trump-appointed governor Stephen Miran voted to cut by 50 basis points, while Kansas City Fed President Jeffrey Schmid voted for no change.

These fissures were underscored by Powell in his post-meeting press conference. He told reporters that officials hold "strongly differing views about how to proceed", meaning easing in December is not the "foregone conclusion" markets had been pricing in. Indeed, December's decision may boil down to a coin-flip between another 25-basis-point rate cut or no change.

This all comes at a challenging moment. Not only are investors navigating an economic data drought caused by the U.S. government shutdown – set to become the longest on record – but the indicators that are available show both a weakening labor market and sticky inflation. 

Meanwhile, the Fed is being heavily politicized, with the Trump administration attacking the central bank's independence as it also prepares to nominate Powell's successor next year. 

It's a perfect storm that markets don't need, especially ones priced for perfection.