Government shutdown, hundreds of thousands of layoffs, and imminent Fed rate cuts

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 amid a data blackout.

The Trump administration is using the shutdown crisis to push through a second round of large-scale federal employee cuts, a strategy seen as a fresh attempt after the failure of Musk's Department of Government Efficiency (DOGE). Due to hiring freezes, layoffs, and voluntary resignations, the government expects the number of federal employees to be down by hundreds of thousands by the end of the year.

Meanwhile, the government shutdown has delayed the release of key economic data, including the September non-farm payroll report and CPI inflation data. Analysts warned that with private sector jobs falling by 32,000 in September and a large-scale resignation of government employees, the U.S. job market faces the risk of further deterioration. In the absence of benchmark data, the Federal Reserve faces greater pressure to cut interest rates. Hundreds of thousands of federal employees may be laid off. The Trump administration's Deferred Resignation Plan reached a critical juncture this week, with approximately 100,000 federal employees being laid off from the government payroll. According to the U.S. Office of Personnel Management, approximately 154,000 federal employees have accepted the program, with two-thirds receiving pay and benefits until the end of the fiscal year on September 30. The program allows federal employees to continue receiving pay and benefits for several months after leaving their jobs. In addition, the government has implemented hiring freezes, forced layoffs, and other voluntary separation programs. Overall, the Trump administration expects the total number of federal employees to be reduced by hundreds of thousands by the end of this year. While the more than 2 million federal employees represent a small proportion of the total U.S. workforce, the cumulative losses across multiple government agencies are putting additional pressure on an already weak job market. Ryan Sweet, chief U.S. economist at Oxford Economics, said federal government layoffs are "one of the reasons for the weakness in the job market in recent months." Vought takes over from Musk, launching DOGE 2.0 After setbacks for Musk's government efficiency department, the Trump administration is now moving forward with a second round of layoffs through Budget Director Russell Vought. The first round of DOGE layoffs was extremely unpopular and disruptive, leading to the Republican defeat in the Wisconsin special election and forcing Musk out of the White House. The government shutdown has given Trump a "second chance" to implement more radical layoffs through Vought. The White House has hinted at going beyond simple furloughs and making permanent layoffs, although these measures are legally controversial. According to the nonpartisan Congressional Budget Office, the current government shutdown is expected to temporarily lay off about 750,000 people. Unlike before, the White House is threatening to permanently lay off additional shutdown-related employees. Policy Risks in a Data Black Hole: The Fed's "Flying Blind Moment" The government shutdown's data blackout is complicating Fed policymaking. The longer the budget dispute drags on, the greater the risk of data disruption. The Bureau of Labor Statistics was unable to release its September employment report, and key CPI inflation data has also been delayed. In the absence of benchmark data, Fed officials are unable to understand labor market and price dynamics at a critical juncture when policy adjustments are needed. In this environment, the risk-management case for rate cuts becomes even more compelling.

September ADP data showed a loss of 32,000 private sector jobs, signaling a weakening labor market. If government employees are laid off without guarantees of rehiring, the labor market could deteriorate further. This risk, coupled with data delays, strengthens the case for preemptive policy easing.

Even if inflation remains above target, many analysts believe the Fed will prioritize cushioning the job market from additional shocks.