Goldman Sachs predicts that the "U.S. government shutdown" will end within two weeks, and that the Fed's interest rate cut in December is "more justified"?

Written by: Long Yue, Wall Street Insights

Following Citigroup, Goldman Sachs is also optimistic that the U.S. government shutdown may 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, the latest analysis report released by Goldman Sachs shows that the partial shutdown of the U.S. federal government, which has lasted for several days, is showing signs of coming to an end. The bank expects the deadlock to most likely be broken around the second week of November.

Regarding how the shutdown affects the Federal Reserve's interest rate decision in December, Wall Street's major banks 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.

Citigroup believes that 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 interest 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.”

Although the duration of this government shutdown is nearing the 35-day record set in 2018-2019, Goldman Sachs believes that “the endpoint is closer than the starting point.”

According to the report analysis, the reason for the prolonged shutdown is partly due to the Trump administration's unconventional measures, using unspent funds from last year to pay for military salaries, thereby temporarily alleviating some conflicts. However, this maneuvering space is gradually running out. As the negative impacts 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 indicates that air traffic delays are a strong catalyst for urging 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 some benefits, payment delays have become a reality.

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

In addition, some political agendas may create a window for reaching an agreement. The report mentions that elections will be held in several states on November 4, and Congress plans to enter a recess after November 7, which could become a driving force for 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 outlook for a rate cut depends on the duration of the “shutdown”.

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

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

However, an article by Wall Street Watch stated that the team of Citigroup analyst Andrew Hollenhorst is 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 sufficient basis for continuing to cut rates by 25 basis points.

Therefore, Citigroup 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 door stays closed, the lower the probability of a rate cut in December, and they outline three scenarios:

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

Scenario 2: Ending in mid-November. In this case, the data will become “more limited,” and the Federal Reserve may only have access to the employment, retail, and inflation reports from September. However, Morgan Stanley analysts suggest that by then, state-level unemployment data and private sector indicators may be able to fill some of the gaps, allowing the Federal Reserve to still potentially move forward with interest rate cuts.

Scenario Three: End of November (after Thanksgiving). This is the most pessimistic scenario. By then, the Federal Reserve is likely to only have the CPI and employment reports from September, while there is a risk of being unable to access other key data such as September's retail sales. In such a “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.

The economic cost is emerging, and GDP growth in the fourth quarter may suffer a heavy blow.

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 broader impact than in the past, affecting far more than just a few agencies involved in previous shutdowns.

Goldman Sachs' team of economists estimates that if the shutdown lasts for about six weeks, it will primarily lead to a 1.15 percentage point decrease in the seasonally adjusted annualized real GDP growth for the fourth quarter of 2025 due to the forced leave of federal employees. As a result, the report has downgraded the fourth quarter GDP growth forecast 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 shifts from the fourth quarter to the first quarter of next year, 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%.