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Fed meets market expectations for cuts, just not Trump’s
The Federal Reserve delivered its first rate cut of 2025 this week, lowering its policy rate by 0.25% in response to a softening labor market. While inflation remains above target, Fed officials said “downside risks to employment have risen”. Powell put a point on it by remarking that this was a preemptive “risk management” move. Most policymakers expect one or two more cuts this year, though views on timing remain split. Regardless, the market is ready to believe the best-case scenario and sent stocks uniformly higher.
Markets it fresh highs this week on rate cut enthusiasm. The Nasdaq gained 2.2% and small-cap stocks, which tend to benefit most from easier policy, surged more than 2% on the week. Bond markets, however, were less enthusiastic. Longer-dated Treasury yields rose after Chair Powell’s comments were viewed as only cautiously dovish, with the 10-year yield settling in at 4.14% for the week after briefly touching 3.99% on Wednesday afternoon.
Economic data still offers a mixed picture. Retail sales rose 0.6% in August, suggesting consumers still have spending power. At the same time, housing starts fell 8.5%, pointing to weakness in construction. GDP is tracking around 3.3% annualized for Q3, a sign the broader economy isn’t rolling over just yet. Initial and continuing jobless claims maintained their path sideways. JOLTS and nonfarm payrolls at the end of the month will be the important reports on labor and should point to whether the labor market is starting to crumble or just being sluggish.
Beyond the Fed, trade headlines also stirred markets. A call between President Trump and President Xi reportedly made progress on TikTok ownership and broader trade issues. Commodities reflected ongoing uncertainty as oil prices weakened on softer demand, gold hit another all-time high above $3,700, and crypto had a modest rally but lagged equities.
What this means for investors
With the Fed cutting rates and tax policy turning supportive, the backdrop heading into 2026 favors equities, especially U.S. large- and mid-caps, and cyclical sectors like financials and consumer discretionary. But expect more market swings ahead, as every labor and inflation report could swing the Fed’s next move.
In other words: Buckle up, but don’t panic. If you’re still a believer at these valuations, then you should be ready for volatility to bring opportunity.
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FOMC press conference takeaways and thoughts [Watch here]
- Get ready for “higher for longer” inflation
- Was this “risk management” cut managing for the downside of the labor market or the political climate?
- Powell seemed more weary than in past meetings. He might be eyeing the door sooner than later
- Michael McKee called out Powell and the Fed for continually projecting hitting targets ~2 years out, and it wasn’t a great answer from Powell (Inflation has been above target for 50+ months)
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Chart(s) of the week
Anna Wong of Bloomberg thinks that the Fed is targeting higher inflation, 2.8% by her calculations. Given that inflation is on pace to reach and remain at 3% this year (in line with the Fed's Summary of Economic Projections), it is puzzling to enter a cutting cycle. It shows the Fed is not rushing to reduce inflation at the expense of the economy. Higher for longer.
@AnnaEconomist
We’re so back. While the top three majors have been clocking ATHs pretty regularly, the Russell 2000 just snapped its 2nd longest streak without a new ATH (967 days). Welcome to the party.
Via Daily Chartbook
This will be over 75% next year, guaranteed. Founders follow the money and the VCs follow the crowd.
Sources: PitchBook, Apollo Chief Economist
A very cool chart. We’ve come a long way and I think it’ll all work out.
Related: Jobs Are Slipping, Inflation’s Sticking — And the Fed Is Cornered