The weakness in the U.S. labor market is being exacerbated by an unprecedented government shutdown, which may force the Federal Reserve to cut interest rates amid a data blackout.

The Trump administration is using the government shutdown crisis to advance a second round of large-scale federal employee reduction plans. This strategy is seen as a renewed attempt after the failure of the Musk-led Government Efficiency department (DOGE). Due to hiring freezes, layoffs, and voluntary departures, the government expects the number of federal employees to decrease by hundreds of thousands by the end of this year.

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 private sector employment falling by 32,000 in September, combined with the large-scale departure of government employees, the U.S. job market faces the risk of further deterioration. In the absence of benchmark data, the Federal Reserve faces increased pressure to cut rates.

Hundreds of Thousands of Federal Employees May Be Cut
The Trump administration's Deferred Resignation Plan reached a critical point this week, with approximately 100,000 federal employees being removed from the government payroll.

According to data from the U.S. Office of Personnel Management, about 154,000 federal employees accepted this plan, with two-thirds of them receiving pay and benefits until the end of the fiscal year on September 30. The plan allows federal employees to continue receiving several months of pay and benefits after departure.

In addition, the government has implemented hiring freezes, forced layoffs, and other voluntary departure programs. Overall, the Trump administration expects the total number of federal employees to be reduced by hundreds of thousands by the end of this year.

Although the more than 2 million federal employees constitute a relatively small portion of the total U.S. workforce, the cumulative losses across multiple government agencies pose additional pressure on an already weak job market. Ryan Sweet, Chief U.S. Economist at Oxford Economics, stated that federal government layoffs are "one reason for the recent weakness in the job market."

Vought Takes Over from Musk, Launches DOGE 2.0
After the setback of the Musk-led Government Efficiency department, the Trump administration is now advancing a second round of layoff plans through Budget Director Russell Vought. In the first round, the massive DOGE layoffs were highly unpopular and disruptive, leading to Republican defeat in a Wisconsin special election and forcing Musk's departure from the White House.

The government shutdown has provided Trump with a "second chance" to implement more aggressive layoff measures through Vought. The White House has hinted at moving beyond simple furloughs to permanent layoffs, although these measures are legally contentious.

According to the nonpartisan Congressional Budget Office, the current government shutdown is expected to temporarily furlough 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 Fed's "Flying Blind Moment"
The "data stoppage" caused by the government shutdown is complicating Federal Reserve policymaking. The longer the budget dispute drags on, the greater the risk of data disruption. The Bureau of Labor Statistics cannot release the September jobs report, and key CPI inflation data has also been delayed.

In the absence of benchmark data, Fed officials cannot gauge labor market and price dynamics at a critical time when policy adjustments may be needed. In this environment, the risk management argument for rate cuts becomes more compelling.

September's ADP data, showing a loss of 32,000 private sector jobs, already indicated labor market weakness. If government employees are laid off with no guarantee of rehire, the labor market will worsen further. This risk, combined with data delays, strengthens the case for pre-emptive easing.

Even with inflation still above target, many analysts believe the Federal Reserve will prioritize cushioning the job market from additional shocks.