Government shutdown = DOGE 2.0! Trump’s new round of “civil servant layoffs” forces the Federal Reserve to cut interest rates?

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The weakness of the U.S. labor market is being exacerbated by an unprecedented government shutdown, which may force the Federal Reserve to cut interest rates in the absence of data.

The Trump administration is using the government shutdown crisis to push forward a second round of large-scale federal employee layoffs, a strategy seen as a renewed attempt after the failure of the Musk administration's Department of Government Efficiency (DOGE). This week, 100,000 federal employees have already left their jobs, and the White House has hinted at further permanent cuts to government staff.

Meanwhile, the shutdown has delayed the release of key economic data, including the September non-farm payroll report and CPI inflation data. Analysts warn that, as 32,000 private sector jobs were lost in September and massive resignations of government employees continue, the U.S. labor market faces further risks of deterioration. In the absence of benchmark data, the Fed is under greater pressure to cut rates.

100,000 employees leave their posts, deferred resignation plan shocks labor market

The Trump administration’s Deferred Resignation Plan entered a critical stage this week.

According to data from the U.S. Office of Personnel Management, about 154,000 federal employees have accepted this plan, two-thirds of whom will have their pay and benefits covered until the end of the fiscal year on September 30.

The plan allows federal employees to continue receiving several months of pay and benefits after leaving their positions. In addition, the government has also enacted hiring freezes, forced layoffs, and other voluntary departure programs. The Trump administration anticipates the total number of federal employees will drop by hundreds of thousands.

Although more than two million federal employees make up a small portion of the U.S. labor force, the accumulated loss across multiple agencies has added extra pressure to an already weak job market. Ryan Sweet, chief U.S. economist at Oxford Economics, noted that federal government layoffs are "one of the reasons for the job market weakness in recent months."

Vought takes over from Musk, initiates DOGE 2.0

After setbacks under Musk’s leadership of the Department of Government Efficiency, the Trump administration is now advancing a second round of layoffs through budget chief Russell Vought. In the first round, DOGE's large-scale layoffs were extremely unpopular and destructive, causing Republicans to lose a special election in Wisconsin and forcing Musk out of the White House.

The government shutdown has given Trump a "second chance" to implement more aggressive layoffs through Vought. The White House has signaled it will go beyond simple furloughs to pursue permanent layoffs, although these measures are legally controversial.

According to the nonpartisan Congressional Budget Office, the current government shutdown is expected to result in about 750,000 temporary layoffs. Unlike before, the White House is now threatening to permanently lay off additional employees linked to the shutdown.

Policy risks in a data blackout: The Fed's "blind flying" moment

The "data blackout" caused by the shutdown is complicating Federal Reserve policymaking. The longer the budget dispute drags on, the greater the risk of data disruptions. The Bureau of Labor Statistics is unable to release the September employment report, and crucial CPI inflation data has also been postponed.

In the absence of benchmark data, Fed officials are unable to gauge labor market and price trends at critical moments when policy adjustments may be needed. In this environment, the rationale for cutting rates as a risk management measure becomes increasingly irresistible.

ADP data for September showed a loss of 32,000 private sector jobs, signaling labor market weakness. If government employees are laid off without any guarantee of reemployment, the labor market will deteriorate further. Combined with data delays, this strengthens the case for preemptive easing measures.

Even with inflation still above target, many analysts believe the Fed will prioritize protecting the job market from further shocks.

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