Key Takeaways
- Markets are now fully pricing an October Fed rate cut and heavily favoring another in December.
- The shutdown’s disruption to government data releases makes it harder for the Fed to “wait and see.”
- The labor market remains weak, while inflation risks from tariffs appear temporary.
- Each day of shutdown means 750,000 federal workers furloughed and $400M in lost pay.
Shutdown Meets Fed Policy Crossroads
If there was any doubt the Federal Reserve would continue easing policy this year, Washington’s budget standoff seems to have erased it. The partial U.S. government shutdown, which began at midnight Thursday, is not only disrupting federal services but also clouding the economic data picture the Fed depends on.
With that uncertainty, Chair Jerome Powell and the FOMC are increasingly likely to err on the side of caution — which in this environment means further rate cuts.
Krishna Guha of Evercore ISI summed it up bluntly:
“The U.S. government shutdown and associated data delays nudge what we judged was already a firmly odds-on Fed rate cut in October further odds-on.”
Markets Move First
Wall Street isn’t waiting for Powell’s confirmation. Futures tracked by CME’s FedWatch tool now show:
- 100% probability of an October cut.
- 88% probability of a December cut (up sharply since the shutdown began).
This shift is not only crucial for bond markets but also reshaping forex trading strategies, as traders reposition around the U.S. dollar, yen, and euro. Similarly, equity and indices trading activity is seeing higher volatility as investors price in policy risk.
Fed’s Balancing Act
At its September meeting, the Fed signaled a narrow majority in favor of two cuts through year-end. While some officials warned tariffs could fuel inflation, most agreed the impact looked temporary.
Now, with a shutdown threatening to delay or cancel crucial data — especially the September jobs report — the Fed faces a “risk management” decision:
- If jobs data aren’t released, Powell may push for a cut to hedge against uncertainty.
- If the shutdown drags on, downside risks to growth multiply, particularly if furloughs become permanent.
This outlook has implications not just for bonds and equities but also for the crypto market, where traders view easier Fed policy as supportive for digital assets. Many are positioning for higher crypto investment flows as interest rates decline.
Shutdown Economics
The Congressional Budget Office (CBO) estimates:
- 750,000 federal workers furloughed per day.
- $400 million in daily lost compensation.
Traditionally, workers receive backpay once the government reopens. But President Trump has suggested re-examining payroll levels, raising the possibility that some furloughs could become permanent layoffs — a sharp break from precedent.
That could worsen what is already a softening labor market. Private payroll processor ADP reported a 32,000 job decline in September. If the BLS is unable to release its full nonfarm payrolls data, policymakers will have even less visibility.
Investor Takeaways
- Rates & Bonds: Treasury yields are likely to drift lower as investors anticipate more Fed easing.
- USD & FX: A dovish Fed outlook weighs on the dollar, particularly against JPY and CHF, while boosting emerging market FX — a dynamic critical for forex trading strategies.
- Equities & Indices: Markets may cheer easier policy in the short term, but prolonged shutdown risks could dampen confidence, affecting indices trading across the S&P 500, Dow, and Nasdaq.
- Commodities & Crypto: Lower yields and weaker USD could lend support to gold and Bitcoin, reinforcing the case for diversified crypto investment strategies.
