U.S. Labor Market Weakness Fuels Rate-Cut Expectations Amid Ongoing Shutdown

Employment insecurity spreads as job market cools
7,000 federal workers file for unemployment benefits
Political deadlock raises fears of delayed recovery

A surge in U.S. jobless claims has reignited concerns over a slowdown in the labor market. With the federal government shutdown showing signs of prolonging, unemployment filings among federal employees have spiked, and several states have even halted the release of labor data, fueling anxiety. As a result, markets now see a high likelihood that the Federal Open Market Committee (FOMC) will cut rates next week. Treasury yields have fallen in anticipation of a more accommodative stance by the central bank, while analysts warn that prolonged political gridlock could delay a broader economic recovery.

Weak labor data fuels expectations for Fed rate cuts

According to Reuters, major financial institutions including Citigroup and Nationwide estimated that new jobless claims in the U.S. reached 232,000 for the week of October 12–18, seasonally adjusted—up 5.4 percent from the previous week and far exceeding market expectations of 220,000. Reuters reported that “after months of slowing momentum, the U.S. labor market now appears to be entering a contraction phase,” adding that “the rise was consistent even in states like Tennessee, Massachusetts, and Colorado, where some data were missing.”

Citigroup economist Gisela Young noted, “October is typically a month of seasonal hiring ahead of the holidays, but this year’s pace is markedly weaker. The Trump administration’s trade policy has also dampened corporate hiring sentiment.” A recent increase in early retirements and voluntary separation programs across federal agencies has also removed more than 150,000 names from public payrolls, further weakening job indicators.

Continuing claims—workers still receiving benefits after their first week—also rose. As of October 11, continuing claims stood at 1.942 million, up from 1.928 million a week earlier. This slowdown in recovery is expected to weigh directly on Federal Reserve policy. A softer labor market increases the likelihood that the Fed will pivot toward economic support rather than inflation control.

The Treasury market has already priced in this shift. According to the Financial Times, the yield on 10-year U.S. Treasuries fell to 4.0 percent, down from 4.19 percent earlier in the month. The decline reflects growing bets on additional rate cuts. Data from the CME FedWatch tool show a 98.8 percent probability of a rate cut this month, with markets increasingly convinced that cooling labor data justify a dovish policy turn.

Shutdown could push unemployment to 4.7% if prolonged beyond three weeks

Analysts widely believe the federal shutdown has intensified labor market pressure. The failure to pass a new budget forced a government shutdown on October 1, leading the White House Office of Management and Budget to issue emergency guidance suspending nonessential operations. About 750,000 federal employees have been placed on unpaid leave, triggering a wave of temporary unemployment across public sectors. During the 35-day shutdown from late 2018 to early 2019, the U.S. suffered an estimated $11 billion in economic losses, with $3 billion permanently unrecovered—raising fears that the latest disruption could have lasting consequences.

According to The Wall Street Journal, unemployment claims among federal workers climbed from 588 before the shutdown to 3,272 in the second week of October, and then to 7,244 the following week—the highest since 2019. ontinuing claimants also rose from 8,672 to 9,430 during the same period. Oxford Economics attributed the surge to “a combination of living-cost pressures among furloughed employees and the expiration of deferred-resignation programs,” warning that claims will continue to rise if back-pay remains uncertain.

Economists predict that if the shutdown lasts beyond three weeks, the U.S. unemployment rate could rise from the current 4.3 percent to between 4.6 and 4.7 percent. Bloomberg Economics cautioned that “furloughed workers will be temporarily counted as unemployed, potentially distorting job data,” and that “higher unemployment could dampen consumption and overall growth.” The Congressional Budget Office (CBO) similarly projected daily wage losses of roughly $400 million, weighing on private spending.

Policy uncertainty chills consumption and investment

Observers warn that the combination of prolonged shutdown and policy paralysis could trap the U.S. economy in a cycle of delayed recovery. As Congress remains deadlocked over budget negotiations, federal agencies face administrative paralysis, disrupting policy execution and delaying key economic data releases—further deepening market uncertainty.

The private sector is already showing signs of strain. Public procurement and licensing have been halted, effectively freezing business operations, while closures of national parks and museums have hurt tourism. Small contractors dependent on federal projects are also facing liquidity shortages, spreading cash-flow stress to local economies.

Major global investment banks have lowered their forecasts. Goldman Sachs expects the shutdown to shave 0.15 percentage points off U.S. real GDP growth in the fourth quarter of 2025. JPMorgan projects that if the impasse persists, weekly output losses could drag annual growth by as much as 0.1 percentage points. Meanwhile, a weaker dollar and rising gold prices point to a growing flight to safety.

Despite mounting costs, the Trump administration has maintained a hard-line stance, saying it is “prepared to take irreversible steps during the shutdown.” Congress remains split, with Republicans leveraging the impasse to promote small-government policies and Democrats refusing to accept welfare spending cuts. Analysts conclude that even if the Fed’s rate cuts provide short-term relief, sustained political risk will continue to limit real-economy momentum.