Federal Reserve’s Response to Government Shutdown: The Likelihood of Interest Rate Cuts
Government Shutdown Increases Odds of Federal Reserve Rate Cuts
October 1, 2025 — Washington, D.C.
A U.S. government shutdown now pushes the Fed toward lowering key rates later this month. Lawmakers still clash over the federal budget. Experts and market watchers see Fed Chair Jerome Powell and the committee prefer a cautious shift in policy as economic risks grow.
Shutdown’s Impact on Fed Policy Decisions
The standoff in Washington started at midnight Thursday. It may worsen economic gaps by slowing down government data and stirring labor market issues. Such events now support a rate cut at the upcoming Fed meeting on October 28–29. Krishna Guha, who leads global policy at Evercore ISI, said in a recent talk that the shutdown tips the odds further in favor of a rate cut. Guha added that the damage from the shutdown and weak labor data now weigh more than inflation worry for policy makers.
Market Pricing Signals Confirmation
The CME Group’s FedWatch tool now shows a 100% probability of an interest rate cut in October and an 88% chance of another cut in December. These numbers have jumped since the shutdown began. Market views now lean toward a softer monetary stance soon.
Economists at Bank of America note that government shutdowns often end before Fed meetings. This timing lets the Fed view complete economic data. Now, with the standoff still active, key gaps appear in data.
• Without a fresh report on September jobs, Chair Powell may see a “risk management” move as needed.
• The Fed may wish to cut rates to ease risks that grow with each day of shutdown stress.
The Labor Market at Risk
The shutdown now hits the labor market hard. The Congressional Budget Office says each extra day of closure forces about 750,000 federal employees into furlough at a cost of $400 million in pay each day.
Past shutdowns meant that furloughed workers later got back pay. But hints from President Trump may mean some staff will face lasting layoffs. This chance now troubles many over the labor market.
Private employers already show strain. ADP counted a drop of 32,000 jobs in September. Data on federal work by the Bureau of Labor Statistics may also show delays if the shutdown goes on. Such delays leave the Fed with less clear signs of economic trends.
Fed’s Evolving Outlook
At the September meeting, a small count of Fed officials backed two rate cuts for this year. Some worry that tariffs may push up prices for a short time. Still, most see inflation head back toward the 2% mark in coming years.
Chair Powell’s words stay practical. He says plans depend on fresh data. The shutdown, though, adds real unknowns. Market watchers now think the Fed may move to ease rules sooner.
Summary of Key Takeaways:
- The government shutdown now makes a Fed rate cut in October more likely.
- Markets show a 100% chance of an October cut and an 88% chance of a December cut.
- Missing job data and weak labor trends press the Fed to act ahead of time.
- Continuing furloughs may bring lasting harm to the labor market and steer Fed policy.
- Fed leaders stay cautious but lean toward easing amid rising economic risks.
As Washington deals with its budget fight, the Fed now must balance fighting price rises and guarding the economy from shutdown impacts and a soft labor scene.
Stay tuned to CNBC for ongoing coverage of economic changes and Fed policy moves.
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