Podcast Summary: Thoughts on the Market

Episode: Investors Monitor Washington’s Ticking Budget Clock
Date: September 26, 2025
Hosts: Michael Zesas (Morgan Stanley Global Head of Fixed Income Research and Public Policy Strategy), Ariana Salvatore (U.S. Public Policy Strategist)

Brief Overview

In this episode, Michael Zesas and Ariana Salvatore discuss the looming threat of a U.S. government shutdown as the end of the fiscal year approaches. They unpack the political stalemate in Washington, potential economic impacts, and how investors are shifting their focus from the possibility of a shutdown to its potential duration and consequences.

Key Discussion Points & Insights

1. Current State of Government Funding Negotiations

• Time Pressure: With just four days until the deadline (October 1st), Congress has not secured a funding agreement.
• Political Stalemate:
  • Republicans: Advocating for a “clean continuing resolution” (CR) to maintain funding at current levels until November 21st, allowing more negotiation time.
  • Democrats: Want to tie funding to legislative deals, particularly about ACA (Obamacare) subsidies and potential Medicaid cuts stemming from Republican-passed legislation earlier in the year.
• Need for Bipartisanship: Despite Republican control, thin majorities in both chambers require cross-party cooperation.
• ([00:43] – Ariana Salvatore)

  “Even though Republicans hold a majority in both chambers, this has to be a bipartisan agreement because of exactly how thin those margins of control are.”

2. Investor Concerns: Not If, But How Long

• Focus Shift: Investors are less worried about whether a shutdown will happen and more about its potential duration.

• ([01:14] – Ariana Salvatore)

  “It seems as we get closer, investors are asking more infrequently whether or not a shutdown is happening and are more interested in how long it could potentially last.”

• Shutdown Duration:

  • Ranges historically from hours to several weeks.
  • Shutdowns generally resolve once the real economic (and thus, political) risk becomes evident, as illustrated by the 35-day Trump-era shutdown ended by disruptions at LaGuardia Airport.

• ([01:36] – Michael Zesas)

  “Historically, shutdowns tend to end when the economic risk, and therefore the attached political risk, gets real.”

3. Economic Impact Assessment

• GDP Effects:
  • Historically, a shutdown reduces GDP by about 0.1% per week.
  • Most losses are quickly recouped once government employees return to work.
• New Risks in 2025:
  • Trump administration discusses making certain layoffs permanent, which could have more profound, lasting economic impact.
  • Zesas emphasizes uncertainty around the credibility and legality of such moves, with potential court battles looming.
• ([02:21] – Michael Zesas)

  “The Trump administration is talking about laying employees off on a durable basis during the shutdown... There would almost certainly be court challenges. But it’s something we have to keep our eye on that could create a more meaningful economic consequence.”

4. Indirect Macro Effects: Data Uncertainty

• Delayed Economic Data:
  • Shutdowns mean key agencies (like the Bureau of Labor Statistics) may not release critical labor and inflation data.
  • This delay impedes market participants’ ability to assess the Fed’s next move.
• ([03:00] – Ariana Salvatore)

  “Much of the federal workforce… will not be working through a shutdown, which could impede the collection and the release of some key data points that matter for markets like labor and inflation data…”

5. Market Reaction Expectations

• Potential Market Movements:
  • Treasury yields could fall, equities may see increased volatility.
  • Effects could be temporary, but lack of data increases risk of outsized or misdirected market moves.
• ([03:35] – Michael Zesas)

  “Even a short shutdown can have outsized market effects.”

Notable Quotes & Memorable Moments

• On the urgency of bipartisanship:
  ([00:43] – Ariana Salvatore)

  “This has to be a bipartisan agreement because of exactly how thin those margins of control are.”

• Shutdowns ending with political risk:
  ([01:36] – Michael Zesas)

  “Historically, shutdowns tend to end when the economic risk, and therefore the attached political risk, gets real.”

• On possible durable layoffs:
  ([02:21] – Michael Zesas)

  “There would almost certainly be court challenges. But it’s something we have to keep our eye on...”

• On macro uncertainty due to data delays:
  ([03:00] – Ariana Salvatore)

  “Much of the federal workforce… will not be working through a shutdown, which could impede the collection and the release of some key data points that matter for markets...”

• Market reaction caution:
  ([03:35] – Michael Zesas)

  “Even a short shutdown can have outsized market effects.”

Useful Timestamps for Important Segments

• [00:11] – Episode theme: Looming government shutdown
• [00:43] – Breakdown of Republican and Democratic positions
• [01:14] – Shift in investor focus to length rather than likelihood of shutdown
• [01:36] – Historical length and triggers to end shutdowns
• [02:21] – New potential risk: permanent layoffs discussion
• [03:00] – Impact of shutdown on economic data reporting
• [03:35] – Expected market response and increased volatility

Conclusion

This episode provides a clear, concise analysis of the complexities surrounding the potential U.S. government shutdown, the key political sticking points, and the differentiated risks facing investors. While government showdowns are common, new wrinkles in 2025—such as threats of permanent layoffs—add a layer of unpredictability. For investors and market watchers, the core message is to expect volatility and increased macroeconomic uncertainty, particularly if the shutdown disrupts the flow of crucial economic data.

Tone and language preserved to convey the expert, measured style of the hosts.