The government shutdown is likely to cement additional Fed interest rate cuts

If any doubts remained about whether the Federal Reserve will be lowering its key interest rate later this month, the budget loggerheads a few blocks away in the nation's capital may have cemented the move.

Particularly if the impasse stretches out past a few days, Chair Jerome Powell and his fellow central bankers likely will err on the side of caution, which in this case would be a bias towards easing, Wall Street experts say.

“The US government shutdown and associated data delays nudge what we judged was already a firmly odds-on Fed rate cut in October further odds-on,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a client note.

Potential damage from the lockdown combined with ongoing concerns over the labor market will outweigh inflation concerns, he added.

“Our further lean into October – in spite of ongoing cautious language from Fed officials – reflects the even lower probability post-shutdown the Fed will get enough reassurance on labor market in time to rein in the soft default of successive cuts” through the end of the year that the Fed indicated in projections released last month, Guha said.

A narrow majority of officials at the September meeting of the Federal Open Market Committee indicated a preference of two cuts instead of one through the end of 2025. Some have expressed concern that tariffs could yet push inflation higher. Most, though, have said the impacts appear temporary and unlikely to halt a trend of gradual softening that will bring inflation back to the Fed's 2% target in a few years.