Government shutdown = DOGE 2.0! Trump's new round of "civil servant layoffs" forces the Federal Reserve to cut interest rates?
This week, 100,000 federal employees have left, and the White House has hinted at further permanent cuts to government employees, posing a risk of further deterioration in the U.S. job market. Due to the delay in the release of key employment and inflation data, the Federal Reserve is unable to understand labor market and price dynamics at a critical moment when policy adjustments are needed. In this environment, the risk management rationale for interest rate cuts becomes increasingly compelling
The fatigue 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 data interruptions.
The Trump administration is using the government shutdown crisis to advance a second round of large-scale federal employee layoffs, a strategy seen as a retry after the failure of the Musk administration's Department of Government Efficiency (DOGE). This week, 100,000 federal employees have left, and the White House has hinted at further permanent cuts to government employees.
Meanwhile, 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, coupled with the large-scale departure of government employees, the U.S. job market faces further deterioration risks. In the absence of benchmark data, the Federal Reserve faces greater pressure to cut interest rates.
100,000 Employees Depart, Delayed Resignation Plan Impacts Job Market
The Trump administration's Deferred Resignation Plan reached a critical point this week.
According to data from the U.S. Office of Personnel Management, approximately 154,000 federal employees have accepted this plan, with two-thirds of the employees' salaries and benefits paid until the end of the fiscal year on September 30.
The plan allows federal employees to continue receiving several months of salary and benefits after leaving. In addition, the government has implemented hiring freezes, forced layoffs, and other voluntary departure programs. The Trump administration expects the total number of federal employees to decrease by hundreds of thousands.
Although over 2 million federal employees represent a small proportion of the total U.S. labor force, the cumulative losses across multiple government agencies exert 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, Launches DOGE 2.0
After the setbacks faced by the government efficiency department led by Musk, the Trump administration is now advancing a second round of layoffs through budget director Russell Vought. The first round of DOGE layoffs was highly unpopular and destructive, leading to a Republican defeat in the Wisconsin special election and forcing Musk to leave the White House.
The government shutdown provides Trump with a "second chance" to implement more aggressive layoff measures through Vought. The White House has hinted at going beyond simple mandatory leave to pursue permanent layoffs, although these measures are legally contentious.
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 now threatening to permanently cut additional employees related to the shutdown.
Policy Risks in a Data Black Hole: The Federal Reserve's "Blind Flying Moment"
The "data standstill" caused by the government shutdown is complicating policy-making for the Federal Reserve. 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, Federal Reserve 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.
The ADP data for September showed a decrease of 32,000 jobs in the private sector, indicating a weakening labor market. If government employees are laid off without guarantees of reemployment, the labor market will deteriorate further. This risk, compounded by data delays, strengthens the case for preemptive easing policies.
Even though inflation rates remain above target, many analysts believe the Federal Reserve will prioritize cushioning the labor market from additional shocks
