Despite a 45-Day Shutdown, Job Stability Upends the Market’s Rate-Cut Calculus

Labor-market data remain stable despite fears of severe job losses
The logic of “rising unemployment → need for rate cuts” collapses
Tariff-driven inflation pressures strengthen the case for holding rates

The U.S. federal government shutdown that lasted until mid-October had fueled the market’s worst-case scenario of a “labor-market collapse.” With nearly two months of missing official data, many investors assumed that unemployment had surged and layoffs had intensified—expectations that bolstered the argument for rate cuts. But weekly jobless-claims data released belatedly by the Department of Labor showed little deviation from prior averages, signaling that assumptions of widespread labor-market damage were misplaced. This sharply reduced expectations of rate cuts and shifted focus toward tariff-driven inflation pressures that are now expected to shape the Federal Reserve’s policy path.

Labor indicators remain broadly stable

According to weekly jobless-claims data published by the Department of Labor on the 18th (local time), new claims filed between October 12–18 reached 232,000. Markets had widely expected a spike given that the shutdown had stalled administrative operations for nearly six weeks, but the figure stayed close to the preceding four-week average of 237,000 recorded from August 24 to September 30. Continuing claims also rose only slightly to 1.957 million, compared with the previous average of 1.927 million.

Labor-market resilience is evident across other indicators as well. In a monthly labor-conditions index released on the 6th, the Chicago Fed reported an October unemployment rate of 4.36 percent—virtually unchanged from September’s 4.35 percent—reinforcing the stability of the employment base. Since the pandemic, U.S. labor supply has recovered slowly, but demand has remained robust enough to maintain balance. The latest unemployment figures show no evidence of the feared chain reaction of administrative paralysis, mass layoffs, and rising unemployment, undermining the early narrative that the shutdown would immediately strain the labor market.

The Labor Department plans to release the delayed September employment report on the 20th, though Kevin Hassett of the White House National Economic Council has warned it will be a “half report” that excludes unemployment data. Markets are now focused on how much, if any, labor-market cooling occurred during the shutdown and whether the stability seen in weekly jobless claims will also appear in the monthly data. But with most available indicators pointing to a firm labor base, markets are largely unwinding the previously dominant “jobless-surge scenario.”

Rate-cut expectations were excessively priced in

Until recently, markets had heavily bet on a December rate cut, assuming unemployment would rise. Unemployment and policy rates generally move in tandem with the economic cycle, and when labor-market weakness becomes clear, central banks often cut rates to counter softening demand and prevent economic contraction. During the shutdown, the absence of data amplified expectations of labor-market deterioration, becoming the core justification for stronger rate-cut bets.

A drop in October job openings to their lowest level since February 2021 also supported expectations of rising unemployment and impending rate cuts. According to job-site Indeed, its job-posting index stood at 101.9 as of October 24, down 0.5 percent from the start of the month. Given the baseline of 100 in February 2020, this level reflects a retreat toward pre-pandemic conditions and is about 3.5 percent lower than mid-August. Wage-offer data also showed cooling, with posted wage-growth slowing from 3.4 percent in January to 2.5 percent in August—evidence that labor demand has been cooling for months.

The shutdown delayed the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS), intensifying uncertainty. Normally released in early October, the report would have provided clarity on hiring and quits, but its postponement forced markets to rely on alternative indicators. The last JOLTS report, published in August, showed 7.23 million openings—down 7 percent from the start of the year. Combined with private surveys pointing to weakened hiring capacity, many analysts concluded that October job figures would likely show deeper declines.

This sequence illustrates how data blackouts distort rate expectations. When a Dow Jones survey projected a loss of 60,000 jobs and a rise in unemployment to 4.5 percent, CME FedWatch saw the probability of a December rate cut surge into the high-40 percent range. But once actual labor data proved far better than expected, the entire argument unraveled. The shutdown-driven “information blackout” had inflated fears of labor-market weakness and pushed rate-cut expectations to artificially high levels.

Tariff shock brings inflation risks back to the forefront

Meanwhile, rising inflation pressures have redirected market attention toward the likelihood of holding rates steady in December. Tariff-induced increases in import costs pushed the September Consumer Price Index (CPI) up 3.0 percent year over year, far above the Fed’s 2 percent target. Prices for food, dining, and low-cost apparel—categories most exposed to tariffs—have risen sharply, with low-income households experiencing inflation levels well above headline numbers. Markets increasingly expect these dynamics to make the Fed more cautious about easing.

Indicators of how tariffs distort real demand and consumption patterns also reinforce the case for holding rates. According to CoStar, luxury hotel revenue rose 2.9 percent in the second quarter year over year, while budget hotel revenue fell 3.1 percent. During the same period, Delta Air Lines saw economy-class revenue drop 5 percent, while premium-class revenue rose 5 percent. These trends illustrate widening consumption polarization: higher-income consumers continue spending, while lower-income households pull back. This supports the view that the Trump administration’s tariff policy disproportionately burdens certain income groups and ultimately fuels deeper consumption divides.

Policymakers are responding with more caution. St. Louis Fed President Alberto Musalem and Boston Fed President Susan Collins both argued recently that with limited room for easing, keeping rates at current levels is appropriate, emphasizing the need to manage tariff-driven inflation risks. If upcoming CPI and PCE data for October and November show additional upward pressure, markets expect the Fed’s rate path to shift even further toward restraint.

Amid this backdrop, President Donald Trump drew criticism at a McDonald’s franchise event after touting his inflation-stabilization record. Claiming that “we inherited a mess from the Democrats, but inflation is now nearly back to normal,” he said Americans were “lucky to have me as president.” But data showing that McDonald’s has seen double-digit drops in usage among low-income customers highlighted a disconnect between his message and consumer reality.

The backlash intensified as beef prices—seen as a primary driver of McDonald’s menu inflation—were shown to have risen 14.7 percent over the past year, partly due to tariff increases. A Washington Post–ABC poll released the same day found that 59 percent of respondents identified the Trump administration’s high-tariff policy as the main cause of inflation. Ultimately, Trump’s claims of “taming inflation” were widely perceived as inconsistent with the lived experience of consumers, heightening political costs rather than easing them.