Government Shutdown Aftermath: Fed Data Fog Collapses December Rate Cut Odds from 92% to 67%

This analysis is based on the Benzinga report [1] published on November 13, 2025, which examines the market implications following the conclusion of the U.S. government shutdown. While markets initially rallied on the shutdown’s end, the analysis reveals that the more significant challenge is the Federal Reserve’s unprecedented “data fog” resulting from six weeks of missing economic reports.

The market reaction reflects this uncertainty, with current data showing broad-based weakness:

• S&P 500: -0.71% [0]
• NASDAQ: -1.10% [0]
• Dow Jones: -0.46% [0]
• Russell 2000: -1.53% [0]

Rate-sensitive sectors are experiencing the most significant stress, confirming the article’s thesis about vulnerability to higher-for-longer rates. Small-cap stocks (IWM) declined 1.58% to $239.80, utilities (XLU) fell 1.01% to $89.02 as the worst-performing sector at -2.30%, and real estate (XLRE) dropped 0.30% to $41.24 [0][2].

The most critical finding is the dramatic collapse in December rate cut probabilities. External data corroborates the article’s assessment, with CME FedWatch showing only 52% probability for a December cut, down from 95% a month ago [3], while Fortune reports odds in the 63-67% range [4]. This represents a fundamental shift from near-certainty to coin-flip territory, creating unprecedented policy uncertainty.

The shutdown’s economic impact is substantial and measurable:

• $11 billion
  in permanently lost economic activity [1]
• $16 billion
  in missed federal worker wages by mid-November [1]
• Expected
  2.2 percentage point
  boost for Q1 2026 growth [1]

These figures suggest that while Q4 2025 will show weakness, there may be a significant rebound opportunity in Q1 2026 once the shutdown effects reverse.

The analysis identifies concerning dynamics in Treasury markets, including upward pressure on short-term rates with TGCR increasing to 13 basis points above IORB, and repo market stress indicators suggesting potential funding volatility [1]. The ten-year yield has fallen 40 basis points to 4.0% since September rate cuts resumed, creating complex yield curve dynamics that complicate Fed policy transmission.

1. Fed Pause Risk
   : The 25+ point drop in rate cut odds suggests markets may be underpricing a December pause [1][3]. This represents the most significant immediate risk, particularly for rate-sensitive sectors.

2. Q4 GDP Weakness
   : The $11 billion permanent economic loss will directly impact fourth-quarter growth [1]. Companies with significant Q4 exposure may face earnings pressure.

3. Consumer Spending Gap
   : The mid-November to early December period faces significant spending weakness as federal workers await back pay distribution scheduled for November 15-19 [1].

The article identifies a sophisticated risk-reward scenario: the disconnect between equity volatility (VIX ~17.6) [5] and Treasury volatility (historically low 72 basis points on 10-year swaps) suggests both markets may be underpricing potential simultaneous Fed-induced volatility spikes [1]. Current VIX levels below the historical average of 20 indicate market complacency that could correct sharply.

face particular risk but also potential rebound opportunities:

• Utilities (XLU): Most vulnerable to higher-for-longer rates but may benefit from defensive positioning [1]
• REITs (XLRE): Sensitive to yield curve dynamics but could rebound if rate cuts eventually materialize [1]
• Small caps (IWM): Most exposed to financing cost increases but offer higher growth potential [1]

face both short-term cash flow disruptions and longer-term contract award delays, creating potential entry points for patient investors [1].

The government shutdown’s conclusion has created a complex market environment characterized by unprecedented Fed data uncertainty rather than immediate relief. The permanent loss of September and October economic data creates a blind spot for policymakers through at least the December FOMC meeting on December 9-10 [1].

Key monitoring dates include November 15-19 for federal worker back pay distribution and late November when Q4 GDP weakness should become apparent [1]. The $11 billion permanent economic damage will directly impact fourth-quarter results, while the expected 2.2 percentage point Q1 2026 growth boost may create significant rebound opportunities.

Current market positioning appears to underappreciate both the magnitude of Fed uncertainty and the potential for volatility spikes. The convergence of missing economic data, collapsing rate cut probabilities, and sector-specific stress creates a high-risk, high-potential environment requiring careful monitoring of delayed data releases and Fed communications.