Government shutdown, hundreds of thousands will be laid off. Fed interest rate cuts are imminent.

The fatigue of the US labor market is exacerbated by an unprecedented government shutdown, which may force the Fed to cut interest rates in the face of data interruptions.

The Trump administration is leveraging the government shutdown crisis to promote a second round of large-scale federal employee layoffs, a strategy viewed as a retry after the failure of the Musk administration's efficiency department (DOGE). Due to hiring freezes, layoffs, and voluntary departures, the government expects the number of federal employees to decrease by hundreds of thousands by the end of this year.

At the same time, the government shutdown has caused delays in the release of key economic data, including the September non-farm payroll report and CPI inflation data. Analysts warn that with a reduction of 32,000 jobs in the private sector in September, combined with the large-scale departure of government employees, the U.S. labor market faces further deterioration risks. In the absence of benchmark data, the Fed 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 point this week, with about 100,000 federal employees cut from the government payroll.

According to data from the U.S. Office of Personnel Management, about 154,000 federal employees participated in the program, with two-thirds of employees' salaries and benefits being paid until the end of the fiscal year on September 30. The program allows federal employees to continue receiving several months of pay and benefits after leaving their jobs.

In addition, the government has implemented a hiring freeze, mandatory layoffs, and other voluntary departure programs. Overall, the Trump administration expects the total number of federal employees to decrease by hundreds of thousands by the end of this year.

Although the over 2 million federal employees account for a small proportion of the total workforce in the United States, the cumulative losses from multiple government agencies are putting additional pressure on an already weak job market. Ryan Sweet, chief U.S. economist at Oxford Economics, stated that 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 the government efficiency department led by Musk encountered setbacks, the Trump administration is now pushing a second round of layoffs through budget director Russell Vought. The first round, marked by significant layoffs at DOGE, was highly unpopular and destructive, leading to the Republican defeat in the Wisconsin special election and forcing Musk to leave the White House.

The government shutdown has provided Trump with a "second chance" to implement more aggressive layoffs through Vought. The White House has hinted at going beyond simple mandatory leave to pursue 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 cut additional employees related to the shutdown this time.

Policy Risks in the Data Black Hole: Fed's "Blind Flying Moment"

The "data stagnation" caused by the government shutdown is complicating the Fed's policy-making. The longer the budget dispute drags on, the greater the risk of data interruptions. The Bureau of Labor Statistics is unable to release the 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 critical moments when policy adjustments are needed. In this environment, the risk management rationale for interest rate cuts becomes increasingly compelling.

ADP data for September showed a decrease of 32,000 jobs in the private sector, indicating a weak labor market. If government employees are laid off without guarantees of rehire, the labor market will deteriorate further. This risk, combined with data delays, strengthens the rationale for preemptive easing policies.

Even though the inflation rate is still above the target, many analysts believe that the Fed will prioritize cushioning the job market from additional shocks.