Goldman Sachs predicts that the government shutdown is about to end, paving the way for the Fed to cut interest rates in December.

Author: Long Yue, Wall Street Insight

Original Title: Goldman Sachs predicts “U.S. government shutdown” will end within two weeks, is there “more basis” for the Fed to cut rates in December?

Following Citigroup, Goldman Sachs is also optimistic that the U.S. government shutdown is expected to “end within two weeks,” which is crucial for the Federal Reserve that relies on data for decision-making.

According to news from the Chasing Wind Trading Platform, Goldman Sachs' latest analysis report shows that the partial shutdown of the U.S. federal government, which has lasted for several days, is showing signs of an end. The bank expects the deadlock to be most likely broken around the second week of November.

Regarding how the shutdown will affect the Fed's interest rate decision in December, major Wall Street firms generally believe that the duration of the shutdown is the key variable. Previously, Citigroup stated in a report that it is “increasingly confident” that the government shutdown will end within the next two weeks.

Citi believes that once the government reopens, data releases will quickly recover, and the Federal Reserve “may receive up to three employment reports” before its December meeting, which will provide sufficient basis for continuing to cut rates by 25 basis points. Therefore, the bank maintains its baseline forecast for consecutive rate cuts by the Federal Reserve in December, January, and March.

The deadlock is expected to be broken, Goldman Sachs predicts it will end “within two weeks”

Despite the fact that the duration of this government shutdown is close to surpassing the 35-day record set in 2018-2019, Goldman Sachs believes that the “end of the government closure is closer than the starting point.”

According to the report analysis, one of the reasons for the prolonged shutdown is that the Trump administration took unconventional measures, using unspent funds from last year to pay military salaries and other expenses, thus temporarily alleviating some conflicts. However, this maneuvering space is gradually running out. As the negative effects of the shutdown continue to accumulate, several key pressure points are forcing both parties in Congress to seek compromise.

First, air traffic controllers and airport security personnel missed the first full payday on October 28. This increases the risk of delays in air travel, especially with the second payday approaching on November 10. The experience of the 2018-2019 shutdown showed that air traffic delays are a powerful catalyst for prompting the government to reopen.

Secondly, the payments for the Supplemental Nutrition Assistance Program (SNAP, i.e., food stamps) have also been interrupted. Although a court ruling requires the government to use emergency funds to pay part of the benefits, payment delays have become a reality.

Once again, the salaries of congressional staff are also affected, which may directly prompt lawmakers to accelerate their pace of compromise.

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

Overall, Goldman Sachs currently expects that the shutdown “is most likely to end around the second week of November.”

Is a rate cut expected in December? The prospect of a rate cut depends on the duration of the “shutdown”

According to Goldman Sachs' projections, if the government reopens around mid-November, the Bureau of Labor Statistics (BLS) may need a few days to release the delayed September employment report. More importantly, the November employment report, which is scheduled to be released on December 5, and the November CPI report, which is scheduled for December 10, may face the risk of being delayed by a week.

Employment and inflation are the two core pillars of the Federal Reserve's monetary policy decision-making. However, the report indicates that it is currently unclear how the Bureau of Labor Statistics will handle the missing data for October.

However, the Wall Street Journal article stated that Citigroup's analyst Andrew Hollenhorst and his team are more optimistic.

In a report, it stated that it is “increasingly confident” that the government shutdown will end within the next two weeks. Once the government reopens, data releases will quickly resume, and the Federal Reserve “may receive up to three employment reports” before the December meeting, which will provide ample justification for continuing to cut rates by 25 basis points.

Therefore, Citibank maintains its baseline forecast for the Federal Reserve to cut interest rates consecutively in December, January, and March of next year.

Morgan Stanley economist Michael T Gapen's team believes that the longer the closure lasts, the lower the probability of a rate cut in December, and outlines three scenarios:

Scenario 1: Ending next week. If the government reopens quickly, the Federal Reserve will likely receive three employment reports for September, October, and November, as well as key data such as the CPI and retail sales for September and possibly October before the December meeting. Morgan Stanley believes this data will be sufficient to support a decision to cut interest rates.

Scenario Two: Ending in mid-November. In this case, the data will become “more limited,” and the Federal Reserve may only be able to obtain employment, retail, and inflation reports from September. However, Morgan Stanley analysts stated that by then, state-level unemployment data and private sector indicators may help fill in some gaps, allowing the Federal Reserve to still potentially proceed with interest rate cuts.

Scenario 3: End of Thanksgiving (late November). This is the most pessimistic scenario. By then, the Federal Reserve will likely only have access to the CPI and employment reports from September, while there is a risk of not obtaining key data such as September retail sales. In this “data vacuum,” unless there are strong signals of deterioration from state-level or the private sector, the likelihood of the Federal Reserve pausing interest rate cuts in December will be higher.

Economic costs emerge, GDP growth in the fourth quarter may be severely impacted

In addition to affecting the Federal Reserve's decisions, the economic cost of this shutdown should not be underestimated. Goldman Sachs emphasized in its report that this shutdown may not only last the longest but also have a wider impact than previous ones, affecting far more than just a few institutions.

Goldman Sachs' team of economists estimates that if the shutdown lasts for about six weeks, it will primarily result in a 1.15 percentage point reduction in the annualized real GDP growth for the fourth quarter of 2025 due to the forced leave of federal employees. As a result, the report has revised the fourth quarter GDP growth forecast down to 1.0%.

However, this impact is largely temporary. The report expects that as vacationing employees return to work and some federal procurement and investment shift from the fourth quarter to the first quarter of next year, the GDP growth in the first quarter of 2026 will receive a boost of 1.3 percentage points, raising the GDP growth forecast for that quarter to 3.1%.