Guolian Minsheng: Will the U.S. Government Shut Down Again?

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Source: Chuan Yue Global Macro

Last October, the U.S. government experienced a record 43-day shutdown, leaving a lasting impact on livelihoods and markets. Just over two months later, the threat of another shutdown looms over the U.S. again. As the deadline for the federal government’s temporary funding bill at the end of January 2026 approaches, recent incidents in Minnesota involving law enforcement shootings have become a new trigger. Divisions between the two parties over Department of Homeland Security funding and immigration enforcement reform have further intensified. Currently, market bets on the likelihood of a shutdown have risen to nearly 80%. The U.S. federal government faces the severe risk of shutting down again. How likely is this shutdown, and how does its impact compare to the last one?

First, unlike the debate in October 2025 over delaying healthcare provisions, the core issue this time is funding for the Department of Homeland Security. To avoid a government shutdown, Congress needs to review 12 appropriations bills by the end of January. So far, six bills have successfully passed both chambers; the remaining six are bundled for a vote in the House and awaiting Senate approval. These cover key areas such as homeland security, defense, financial services, administrative affairs, labor, healthcare, education, transportation, and housing.

Notably, due to ongoing fallout from the two immigration and Customs Enforcement (ICE) shootings in Minnesota in January, Democrats have explicitly stated they will refuse to allocate funds for DHS in related appropriations bills. They also demand strict limits on ICE’s enforcement overreach, including bans on searches without warrants and mandatory body cameras for ICE agents. We believe that if the two parties cannot reach a consensus on these issues, it could directly lead to a shutdown of DHS and other related federal agencies.

Although there is still a short-term possibility to avoid a full shutdown, the window of opportunity is narrowing rapidly. The probability of government closure is rising sharply:

Especially for Senate Democrats, there is little room for compromise on ICE reform. According to a recent poll by The Economist, support for abolishing ICE nationwide has risen to 46%, and among core Democratic voters, it’s as high as 77%. We believe that Democrats’ firm stance on ICE reform aligns with the demands of their core and swing voters, serving to solidify their base and build political capital ahead of midterm elections. Therefore, their willingness to make concessions may be limited.

However, Democrats are also reluctant to bear the political and public relations costs of a shutdown, showing some flexibility in negotiations. Senate Democrats have proposed a compromise: prioritize passing five uncontested appropriations bills before the deadline and separate the more contentious DHS funding bill to ensure 96% of government funding remains operational, thus avoiding primary responsibility for a shutdown. This approach conflicts with Senate Republicans’ goal of passing all six bills together in one package, further narrowing the scope for negotiation.

More critically, even if the Senate can bridge its divisions and agree on a compromise, the legislative process faces a final hurdle—the House is already in recess this week. Whether lawmakers can return promptly to complete voting remains uncertain. Overall, the time left for both parties to resolve differences and complete legislation is running out.

Even if the federal government ultimately shuts down, we expect its duration and impact to be less severe than in October 2025. Compared to that time, the current environment faces multiple challenges: the Trump administration’s policy implementation is under pressure from ongoing domestic disputes over cases like Cook and tariffs, while international tensions over Greenland and Iran remain unresolved. These pressures limit policy maneuvering space, making prolonged deadlock unlikely.

Meanwhile, the midterm elections are approaching, and public opinion has become a key variable in the political game. After setbacks in regional gubernatorial elections and nationwide protests over ICE enforcement, public calls for reform are rising. Under these circumstances, the Trump administration is unlikely to push for full DHS funding or allow a long government shutdown, fearing political costs and loss of swing voters’ support.

In fact, Trump has already engaged with Minnesota officials, agreeing to reduce federal law enforcement presence in the state and investigate the shootings, signaling a potential easing of tensions. We believe that even if a shutdown occurs in the short term, both parties are likely to reach a temporary consensus or extend negotiations, quickly breaking the deadlock.

Based on this, we think the direct impact of this shutdown on U.S. GDP will be relatively small. However, markets should remain alert to several key risks:

1. Data delays—an ongoing issue. If the shutdown lasts longer than expected, the U.S. Labor Department’s non-farm payrolls report scheduled for next week will likely be delayed, and subsequent releases of core inflation data like CPI could also be affected, plunging markets into policy uncertainty and complicating decision-making.

2. Liquidity drain risks at the fiscal level. During the October 2025 shutdown, the U.S. Treasury’s General Account (TGA) surged, reducing bank system liquidity and suppressing risk appetite.

Since Q1 is typically tax season in the U.S., TGA funds are seasonally released. A prolonged shutdown could disrupt tax refunds and liquidity flows, weakening the support for risk assets like stocks and impacting market stability.

Adding to recent international risks—yen appreciation expectations, ongoing Middle East tensions, and renewed tariffs—risk aversion has become a key consideration for some investors. Gold and other precious metals have accelerated in price, reflecting rising market risk sentiment.

In summary, the recurring threat of U.S. government shutdowns is fundamentally a procedural challenge within the American political system, not a money problem. When public fiscal issues that should be addressed through bipartisan rational negotiation are instead used as political tools to compete for voter support and electoral advantage, domestic governance effectiveness continues to decline amid political infighting. As we noted in our previous report, “U.S. Government Shutdown: The Prelude to Fiscal Battles,” the October 2025 shutdown was just a phase in ongoing political struggles. In the short term, the persistence of fiscal issues—especially before the midterm elections—remains a potential source of market volatility.

Risk Warning: Major changes in U.S. trade policies; unexpected spread of tariffs leading to a slowdown in the global economy; market volatility caused by an extended U.S. government shutdown.