Goldman Sachs predicts that the government shutdown is about to end, paving the way for a Federal Reserve rate cut in December.

Author: Long Yue, Wallstreetcn

Original Title: Goldman Sachs predicts "US government shutdown" will end within two weeks, is there "more basis" for a Fed rate cut in December?

Following Citibank, Goldman Sachs is also optimistic in estimating that the US government shutdown is likely to end "within two weeks," which is crucial for the data-dependent Federal Reserve.

According to Trading Desk News, Goldman Sachs' latest analysis report shows that the partial shutdown of the US federal government, which has lasted for several days, is showing signs of ending. The bank expects the deadlock is most likely to be broken around the second week of November.

Regarding how the shutdown will affect the Fed's December rate decision, major Wall Street banks generally believe that the duration of the shutdown is the core variable. Previously, Citibank stated 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 Fed "may obtain up to three employment reports" before the December meeting, which will provide sufficient basis for a further 25 basis point rate cut. Therefore, the bank maintains its baseline forecast for consecutive Fed rate cuts in December, January, and March next year.

Deadlock Expected to Break, Goldman Sachs Predicts "End Within Two Weeks"

Although this government shutdown is close to surpassing the 35-day record of 2018-2019, Goldman Sachs believes the "end is closer than the beginning."

According to the report, one reason for the prolonged shutdown is that the Trump administration took unconventional measures, using last year's unused funds to pay military salaries and others, temporarily easing some conflicts. However, this room for maneuver is gradually running out. As the negative effects of the shutdown accumulate, several key pressure points are forcing both parties in Congress to seek compromise.

First, air traffic controllers and airport security staff missed their first full payday on October 28. This increases the risk of air travel delays, especially as the second payday on November 10 approaches. The 2018-2019 shutdown experience shows that air traffic delays are a strong catalyst for reopening the government.

Second, payments for the Supplemental Nutrition Assistance Program (SNAP, i.e., food stamps) have also been interrupted. Although the court has ordered the government to use emergency funds to pay some benefits, payment delays have become a fact.

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

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

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

December Rate Cut in Sight? Rate Cut Prospects Depend on Shutdown Duration

According to Goldman Sachs' projections, if the government reopens around mid-November, the US Bureau of Labor Statistics (BLS) may need a few days to release the delayed September employment report. More importantly, the November employment report originally scheduled for December 5, and the November CPI report originally 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 Fed's monetary policy decisions. However, the report states that it is still unclear how the BLS will handle the missing October data.

However, as Wallstreetcn wrote, Citibank's analyst Andrew Hollenhorst's team is more optimistic.

In a report, they stated that they are "increasingly confident" the government shutdown will end within the next two weeks. Once the government reopens, data releases will quickly resume, and the Fed "may obtain up to three employment reports" before the December meeting, which will provide sufficient basis for a further 25 basis point rate cut.

Therefore, Citibank maintains its baseline forecast for consecutive Fed rate cuts in December, January, and March next year.

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

Scenario 1: Ends next week. If the government reopens quickly, the Fed will likely obtain the September, October, and November employment reports before the December meeting, as well as key data such as September and possibly October CPI and retail sales. Morgan Stanley believes this data is sufficient to support a rate cut decision.

Scenario 2: Ends in mid-November. In this case, data will become "more limited," and the Fed may only obtain the September employment, retail, and inflation reports. However, Morgan Stanley's analysis suggests that state-level unemployment data and private sector indicators may fill some gaps, allowing the Fed to still proceed with a rate cut.

Scenario 3: Ends after Thanksgiving (late November). This is the most pessimistic scenario. At that time, the Fed will likely only obtain the September CPI and employment reports, while key data such as September retail sales may not be available. In this "data vacuum," unless there are strong deterioration signals from the state level or private sector, the probability of the Fed pausing rate cuts in December will be higher.

Economic Costs Emerge, Q4 GDP Growth May Take a Hit

In addition to affecting Fed decisions, the economic cost of this shutdown should not be underestimated. Goldman Sachs emphasizes in the report that this shutdown may not only last the longest, but also has a wider impact than previous shutdowns that only involved a few agencies.

Goldman's team of economists estimates that if the shutdown lasts about six weeks, it will mainly reduce the seasonally adjusted annualized real GDP growth in the fourth quarter of 2025 by 1.15 percentage points due to the mandatory leave of federal employees. As a result, the report lowers the Q4 GDP growth forecast to 1.0%.

However, most of this impact is temporary. The report expects that as furloughed employees return to work and some federal procurement and investment shift from Q4 to Q1 next year, Q1 2026 GDP growth will be boosted by 1.3 percentage points, raising the forecast for that quarter's GDP growth to 3.1%.