Summary4 min read

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.

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Transcript10 lines

[00:01]
A
Welcome to Thoughts on the Market. I'm Michael Zesas, Morgan Stanley's global head of fixed income research and public policy strategy.
[00:07]
B
And I'm Ariana Salvatore, U.S. public policy strategist.
[00:12]
A
Today, our focus is once again on Washington as the US Government fiscal year draws to a close and a potential government shutdown hangs in the balance. It's Friday, September 26th at noon in New York. Arianna, we're just four days away from the end of the month. By October 1st, Congress needs to have a funding agreement in place or we risk a potential shutdown. To that point, Democrats and Republicans seem far apart on the deal to avoid a shutdown. What's the state of play Right now?
[00:44]
B
Republicans are pushing for what's called a clean continuing resolution. That's a bill that would keep funding levels flat while putting more time on the clock for negotiators to hammer out full fiscal year appropriations and and the CR they're proposing lasts until November 21st. Democrats, conversely, are seeking to tie government funding to legislative compromise in other areas, including the enhanced Obamacare or ACA subsidies and potential spending cuts to Medicaid from the One Big Beautiful Bill act, which Republicans signed earlier this year. Remember, 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. But Mike, 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. What are we thinking there?
[01:36]
A
So it's hard to know. Shutdowns typically last a few days, but sometimes they're as short as a few hours, sometimes as long as a few weeks. Historically, shutdowns tend to end when the economic risk, and therefore the attached political risk, gets real. So consider the 35 day shutdown under President Trump in his first term. The compromise that ended it came quickly, after there was an air traffic stoppage at New York's LaGuardia Airport when 10 air traffic controllers who weren't being paid failed to show up for work. So we think the more relevant question for investors is what it all means for economic activity. Our economists have historically argued that a government shutdown takes something like 0.1% off of GDP every single week. It's happening. However, once employees go back to work, a lot of times that effect fades pretty quickly. Now, it's important to understand that this time around there could be a wrinkle. The Trump administration is talking about laying employees off on a durable basis during the shutdown and that's something that maybe would have more of a lasting economic impact. It's hard to know how credible that potential is. 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.
[03:00]
B
That's right. And there are also some really important indirect macroeconomic effects here, like delayed data releases. Much of the federal workforce, to your point, 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, which come from bls, the Bureau of Labor Statistics. So assuming we're in this scenario with a longer term shutdown, obviously we're going to see an increase in uncertainty, especially as investors are looking toward each data print for guidance on what the Fed's next move might be. What do we expect the market reaction to all this to be?
[03:35]
A
Well, the obvious risk here is that markets might have to price in some weaker growth potential. So you could see treasury yields fall, you could see equity markets wobble, be a bit more volatile. It could be that those effects are temporary, though, and that volatility could easily be amplified by having to price risk in the market without the data you were talking about, Arianna. So investors could overreact to anecdotal signals about the economy or underweight some real risks that they're not seeing. So that's why even a short shutdown can have outsized market effects. Well, Arianna, thanks for taking the time to talk.
[04:16]
B
Great speaking with you, Mike, and to our audience.
[04:18]
A
Thanks for listening. If you enjoy thoughts on the market, please leave us a review. Wherever you get this podcast and tell your friends about it, we want everyone to listen.
[04:27]
C
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