Federal Reserve Chair Jerome Powell speaks during a press conference following a two-day meeting of the Federal Open Market Committee at the Federal Reserve on September 17, 2025 in Washington, DC.
Chip Somodevilla | Getty Images
If doubts remain about whether the Federal Reserve will cut its interest rate later this month, budget disputes a few blocks away in the nation’s capital may have cemented that move.
Particularly if the impasse lasts more than a few days, Chairman Jerome Powell and his central bank colleagues are likely to err on the side of caution, which in this case would mean a bias toward easing, Wall Street experts say.
“The U.S. government shutdown and associated data delays further reinforce what we believe is already a certainty for the Fed to cut interest rates in October,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note to clients.
The potential damage from the lockdown combined with ongoing labor market concerns will outweigh inflation concerns, he added.
“Our continued approach to October – despite continued cautious statements from Fed officials – reflects the even lower likelihood that the Fed will get enough post-lockdown labor market certainty in time to stem the soft run of sequential cuts through year-end that the Fed signaled in its forecasts released last month, Guha said.
A slim majority of officials at the September meeting of the Federal Reserve’s Federal Open Market Committee said they would prefer two cuts rather than one by the end of 2025. Some have expressed concerns that the tariffs could drive inflation even higher. But most believe the impact appears to be temporary and unlikely to halt the trend of gradual weakening that will bring inflation back to the Fed’s 2 percent target in a few years.
In turn, markets have priced in a 100% chance of a cut in October and an 88% chance of another cut in December, according to CME Group’s FedWatch futures price tracker. Both are higher since the lockout began at midnight Thursday.
Bank of America noted that history shows the lockdown will likely be over by the Fed’s Oct. 28-29 meeting and officials will have updated data. However, if the impasse continues until then, the bank’s economists see two reasons why FOMC members will vote for a cut.
“First you would need a solid one [September] Job reports to keep one [October] keep in the game. If the [September] With no employment data available, Chairman Powell will likely be inclined to push for further cuts in “risk management,” wrote BofA economist Stephen Juneau. “Second, the Fed would want to guard against the downside risks of a prolonged lockdown, particularly if government workers are laid off.”
The Congressional Budget Office estimates that each day the government remains indecisive results in the layoffs of 750,000 workers with total compensation costs of $400 million.
In previous lockouts, workers were brought back to work with back pay. However, President Donald Trump has threatened an audit of current federal employees and the possibility that some furloughs could be permanent.
That could hurt an already turbulent labor market, where private employment fell by 32,000 in September, according to ADP. A broader Bureau of Labor Statistics count that includes government workers will not be laying off workers as planned on Friday if the shutdown continues.
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