US Federal Government Shutdown: What It Means for the Fed, Interest Rates, and the Dollar

The Fed Flies Blind Without Its Data Compass

This comes at a crucial juncture. The Fed is trying to balance slowing job growth against still-stubborn inflation, and the absence of reliable data only muddies the picture. Logic would suggest a cautious approach, perhaps delaying any policy changes until more clarity emerges. After all, moving rates without up-to-date evidence risks doing more harm than good.

Markets Stay the Course Despite the Uncertainty

Yet markets appear unfazed. Futures pricing continues to imply another 25bps rate cut on October 29, suggesting that both investors and the Fed believe they have enough information to proceed. What gives?

Alternative Indicators Keep Policy on Track

While official BLS releases remain the gold standard, they are far from the only sources of available data. Private-sector data, such as the ADP national employment report, increasingly provide both reliable and timely alternatives, while the Fed’s own Beige Book continues to offer regular snapshots of regional economic conditions. Earlier this week Fed Chair Jerome Powell suggested that these alternative indicators are able to confirm both a cooling in the labour market and a lack of entrenched inflationary pressures, bolstering the case for a further cut this month.

Dollar Strength Driven More by Weakness Elsewhere

If the data blackout isn’t moving rate expectations or the dollar, other forces clearly are. Yet much of the dollar’s recent firming reflects not US resilience, but weakness elsewhere.

In Japan, the yen has slumped following new Prime Minister Sanae Takaichi’s pledge of tax cuts, a move that risks embedding inflation and exacerbating chronic debt concerns. The euro, meanwhile, remains weighed down by political instability in France as President Macron struggles to form a government capable of addressing fiscal challenges. The pound has fared no better, with a stream of grim economic data pointing to stagflation whilst markets tread water ahead of the November 26 Budget, where Chancellor Reeves faces unenviable fiscal choices that could have implications for the country’s growth prospects.

In the Background, the Shutdown’s Economic Toll Starts to Add Up

Against this backdrop, the dollar’s rise looks less like a vote of confidence and more like a default reaction, the “best house in a bad neighbourhood” trade. Even so, the shutdown is not without economic cost: economists estimate it could shave around 0.1% off annualised US GDP growth for each week it lasts, as roughly 750,000 federal workers are furloughed without pay. The last comparable shutdown, in 2018 (also under Trump’s watch), dragged on for over a month.

Trade Tensions Return to the Fore

To complicate matters further, renewed trade tensions with China are clouding the outlook. President Trump’s threat of 100% tariffs in response to China’s restrictions on rare earth exports has rattled global markets and knocked the dollar back, underscoring how quickly sentiment can shift even without fresh economic data.

Gold Shines Amid The Uncertainty, but for How Long?

Gold’s surge past $4,000 per troy ounce tells the same story, investors are seeking safety amid rising uncertainty. For now, the dollar may continue to benefit from relative weakness abroad, but that advantage rests on shaky ground. As the shutdown drags on and global risks mount, volatility rather than stability may be the market’s defining feature in the weeks ahead.