Shutdown Fed rate cuts

If any doubts remained about whether the Federal Reserve will be lowering its key interest rate later this month, the budget loggerheads a few blocks away in the nation’s capital may have cemented the move.

Particularly if the impasse stretches out past a few days, Chair Jerome Powell and his fellow central bankers likely will err on the side of caution, which in this case would be a bias towards easing, Wall Street experts say.

“The US government shutdown and associated data delays nudge what we judged was already a firmly odds-on Fed rate cut in October further odds-on,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a client note.

Potential damage from the lockdown combined with ongoing concerns over the labor market will outweigh inflation concerns, he added.

“Our further lean into October – in spite of ongoing cautious language from Fed officials – reflects the even lower probability post-shutdown the Fed will get enough reassurance on labor market in time to rein in the soft default of successive cuts” through the end of the year that the Fed indicated in projections released last month, Guha said.

A narrow majority of officials at the September meeting of the Federal Open Market Committee indicated a preference of two cuts instead of one through the end of 2025. Some have expressed concern that tariffs could yet push inflation higher. Most, though, have said the impacts appear temporary and unlikely to halt a trend of gradual softening that will bring inflation back to the Fed’s 2% target in a few years.

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In turn, markets have priced in a 100% probability of an October cut and an 88% chance of another in December, according to the CME Group’s FedWatch tracker of futures prices. Both are higher from when the lockout began at midnight Thursday.

Bank of America noted that history shows the lockdown likely will be over by the time the Fed meets Oct. 28-29 and officials will have updated data in hand. However, should the impasse continue until then, the bank’s economists see two reasons why FOMC members will vote to cut.

“First, it would take a solid [September] jobs report to keep an [October] hold in play. If the [September] jobs data are not available, Chair Powell will likely be inclined to push for another ‘risk management’ cut,” BofA economist Stephen Juneau wrote. “Second, the Fed would want to lean against downside risks from an extended shutdown, particularly if government workers are laid off.”

The Congressional Budget Office estimates that each day that government stays dark will mean the layoff of 750,000 workers with total compensation costs of $400 million.

In previous lockouts, workers were brought back on the job with backpay. However, President Donald Trump has threatened an examination on current federal payroll levels and the possibility that some furloughs could be permanent.

That could hurt an already-reeling labor market that saw private payrolls, according to ADP, decline by 32,000 in September. A broader Bureau of Labor Statistics count that includes government workers won’t be released as scheduled Friday if the shutdown continues.