Goldman Sachs predicts "U.S. government shutdown" will end within two weeks, making a Fed rate cut in December "more justified"?

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Following Citibank, Goldman Sachs is also optimistic in predicting that the US government shutdown is likely to end "within two weeks," which is crucial for the Federal Reserve, which relies on data to make decisions.

According to Chase Trader Desk, Goldman Sachs's latest analysis report shows that the ongoing partial shutdown of the US federal government is showing signs of ending, and the bank expects the deadlock to most likely be broken around the second week of November.

Regarding how the shutdown will affect the Federal Reserve's December rate decision, major Wall Street banks generally believe that the duration of the shutdown is the core variable. Previously, Citibank said in a report that it is "increasingly confident" that the government shutdown will end within the next two weeks.

Citibank believes that once the government reopens, data releases will quickly resume, and the Federal Reserve "may obtain up to three employment reports" before the December meeting, which will provide ample basis for another 25-basis-point rate cut. Therefore, the bank maintains its baseline forecast that the Fed will cut rates consecutively in December, January, and March.

Deadlock likely to break, Goldman Sachs predicts "end within two weeks"

Although this government shutdown has almost surpassed the 35-day record of 2018-2019, Goldman Sachs believes the "end is closer than the beginning."

According to the report, the reason this shutdown has lasted so long is partly because the Trump administration took unconventional measures, using unused funds from last year to pay military salaries and others, temporarily alleviating some conflicts. However, this wiggle room is gradually running out. As the negative effects accumulate, several key pressure points are forcing both parties in Congress to seek compromise.

First, air traffic controllers and airport security personnel missed their first full payday on October 28. This increases the risk of flight delays, especially as the second payday approaches on November 10. Lessons from the 2018-2019 shutdown show that air traffic delays are a powerful catalyst for reopening the government.

Second, Supplemental Nutrition Assistance Program (SNAP, i.e., food stamps) payments have also been interrupted. Although court rulings require the government to use emergency funds to pay some benefits, payment delays are now a reality.

Third, the salaries of congressional staff themselves are also affected, which may directly prompt lawmakers to speed up the pace of compromise.

In addition, some political schedules may create a window for an agreement. The report mentions that several states will hold elections on November 4, and Congress plans to go into recess after November 7, which may motivate lawmakers to reach an agreement before then.

All in all, Goldman Sachs now expects that the shutdown is "most likely to end around the second week of November."

December Rate Cut in Sight? Rate Cut Outlook Depends on "Shutdown" Duration

According to Goldman Sachs' projections, if the government reopens around mid-November, the US Bureau of Labor Statistics (BLS) may need several days to release the delayed September jobs report. More importantly, the November jobs report originally scheduled for December 5 and the November CPI report scheduled for December 10 may also be delayed by about a week.

Employment and inflation are the two core pillars of Federal Reserve monetary policy decisions. But the report notes that it is still unclear how the BLS will handle the missing October data.

However, a Wallstreetcn article writes that Citibank analyst Andrew Hollenhorst's team is more optimistic.

In a report, they said they are "increasingly confident" that the shutdown will end within the next two weeks. Once the government reopens, data releases will quickly resume, and the Fed may "have as many as three jobs reports" before the December meeting, providing ample justification for another 25bps rate cut.

Therefore, Citibank maintains its baseline forecast of consecutive rate cuts by the Fed in December, January, and March.

Meanwhile, Morgan Stanley economist Michael T. Gapen's team believes the longer the shutdown, the lower the probability of a December rate cut, listing three scenarios:

Scenario 1: Ends next week. If the government reopens quickly, the Fed will likely obtain three jobs reports for September, October, and November, as well as key data such as September and possibly October CPI and retail sales before the December meeting. Morgan Stanley believes this data is enough to support a rate cut decision.
Scenario 2: Ends mid-November. In this case, the data will become "more limited", and the Fed may only obtain the September jobs, retail, and inflation reports. However, Morgan Stanley's analysts suggest that at that time, state-level unemployment data and private-sector indicators may partially fill the gap, allowing the Fed to still proceed with a rate cut.
Scenario 3: Ends after Thanksgiving (late November). This is the most pessimistic scenario. The Fed will likely only have access to September CPI and jobs reports, while crucial data like September retail sales may be unavailable. In this "data vacuum", unless there are strong deteriorating signals from state or private sector sources, the Fed is more likely to pause rate cuts in December.

Economic Costs Emerge, Q4 GDP Growth May Take a Hit

In addition to affecting the Fed's decision making, the economic cost of this shutdown should not be underestimated. The Goldman Sachs report emphasizes that this shutdown may not only last the longest, but also affect a wider range than previous events that only involved a few agencies.

Goldman Sachs's team of economists estimates that if the shutdown lasts about six weeks, it will primarily reduce fourth quarter 2025 seasonally adjusted annualized real GDP growth by 1.15 percentage points, mainly due to the furlough of federal employees. The report therefore lowers its Q4 GDP growth forecast to 1.0%.

However, most of this impact is temporary. As employees return to work and some federal procurement and investment shifts from Q4 to Q1 next year, the report expects that Q1 2026 GDP growth will get a 1.3 percentage point boost, raising the forecast for that quarter to 3.1%.

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