Goldman Sachs predicts the "U.S. government shutdown" will end within two weeks, giving the Federal Reserve "more reason" to cut rates in December?

Goldman Sachs predicts that the shutdown "is most likely to end around the second week of November," but also warns that key economic data will be delayed.

Written by: Long Yue

Source: Wallstreetcn

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

According to Chasewind Trading Desk, Goldman Sachs' latest analysis report shows that the ongoing partial shutdown of the U.S. federal government is showing signs of ending, with the bank expecting 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 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 Federal Reserve "could obtain up to three employment reports" before the December meeting, providing ample basis for another 25 basis point rate cut. Therefore, the bank maintains its baseline forecast for consecutive rate cuts by the Federal Reserve in December, January, and March next year.

The Deadlock May Be Broken, Goldman Sachs Predicts "End Within Two Weeks"

Although the current government shutdown is approaching the 35-day record set in 2018-2019, Goldman Sachs believes that the "end is closer than the beginning."

According to the report, one reason for the prolonged shutdown is that the Trump administration has taken unconventional measures, using last year's unused funds to pay military salaries and other expenses, temporarily easing some conflicts. However, this room for maneuver is gradually being exhausted. As the negative impact of the shutdown continues to 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 on November 10 approaches. The experience of the 2018-2019 shutdown 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 disrupted. Although a court ruling requires the government to use emergency funds to pay some benefits, payment delays have already occurred.

Third, the salaries of congressional staff themselves have also been affected, which may directly prompt lawmakers to accelerate 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 to "most likely 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 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 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 Federal Reserve's monetary policy decisions. However, the report states that it is still unclear how the BLS will handle the missing October data.

However, according to an article by Wallstreetcn, Citibank 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 Federal Reserve "could obtain up to three employment reports" before the December meeting, providing ample basis for another 25 basis point rate cut.

Therefore, Citibank maintains its baseline forecast for consecutive rate cuts by the Federal Reserve 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 Federal Reserve will likely obtain three employment reports for September, October, and November 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, the data will become "more limited," and the Federal Reserve may only obtain employment, retail, and inflation reports for September. However, Morgan Stanley's analysis suggests that state-level unemployment data and private sector indicators may fill some gaps, allowing the Federal Reserve to still proceed with a rate cut.

Scenario 3: Ends after Thanksgiving (late November). This is the most pessimistic scenario. By then, the Federal Reserve will likely only have access to 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 state-level or private sector data, the likelihood of the Federal Reserve pausing rate cuts in December will be higher.

Economic Costs Emerge, Q4 GDP Growth May Take a Hit

In addition to affecting the Federal Reserve's decisions, the economic cost of this shutdown should not be underestimated. Goldman Sachs emphasizes in its report that this shutdown may not only last the longest, but also has a broader 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 furlough 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 the fourth quarter to the first quarter of next year, Q1 2026 GDP growth will be boosted by 1.3 percentage points, raising the forecast for that quarter to 3.1%.