October 3, 2025
Economic Commentary
A new phase for the U.S. economy has begun, ending a summer of speculation. For months, investors and the Federal Reserve weighed stubborn inflation against a resilient labor market. That watchful waiting ended in September when the Fed cut interest rates—a long-anticipated move that marked a clear turning point from observation to action.
Markets have held up well through the transition. In spite of a sharp drawdown in April, domestic large-cap equities are up about 10% year-to-date, while developed and emerging markets have each returned roughly 25% amid geopolitical and economic uncertainty. Investment-grade fixed income has delivered mid-single-digit gains through the first three quarters of the year. Investors who stayed fully invested through the volatility have been rewarded.
The Wait is Over
In September, the Fed cut rates by 25 bps to 4.00–4.25%—its first cut since December 2024. The updated dot plot lowered the median rate expectation by 0.25% for this year as well as for 2026 and 2027. Bond markets are aligned with the Fed’s 2025 outlook which calls for two more 0.25% cuts however, investors are predicting deeper cuts than policymakers expect next year.
The pivot to policy easing is intended to address a cooling labor market, highlighted by weak jobs reports in July and August accompanied by steep downward revisions to prior data. Nonfarm payrolls increased by just 22K in August (vs. consensus of +75K) and the jobless rate rose to 4.3% from 4.2% in July. Job gains have moderated materially, averaging just 27K per month since May, fanning concerns of ongoing labor market deterioration. Still, consumers remain resilient; August retail sales rose 5% year-over-year and 0.6% month-over-month after adjusting for inflation. Growth was driven by strong year-over-year spending at both physical (+10.7%) and online (+10.1%) retailers, partly offset by lower spending at the pump (-0.7%).
The Fed’s path is complicated by two major obstacles. First, the final push to get inflation back to the 2% target has been challenging. The Consumer Price Index (CPI) rose to 2.9% year-over-year in August, up from 2.7% in July but in line with expectations. The cost of used vehicles (+6.0%), shelter (+3.6%) and food (+3.2%) were key contributors to the overall increase, more than offsetting a decline in gasoline prices (-6.6%). Shelter costs, which represent nearly one third of the consumer price index and tend to impact the index with a lag, continued an elongated path of deceleration. Second, the implementation of secondary tariffs in September threatens to introduce a new wave of cost-push inflation that could counteract the Fed’s efforts. Adding another layer of complexity is the One Big Beautiful Bill Act (OBBBA), a fiscal stimulus set to become expansionary between 2026 and 2028, which could work against monetary tightening in the long run.
Tariff Update
The much-anticipated September 2 deadline for secondary tariffs has now passed, and the new duties are in effect. This development was not entirely unexpected, as negotiations with key trading partners had shown slow progress, prompting many businesses to brace for impact by activating contingency plans. But as businesses begin to navigate this new trade landscape, a significant legal battle is escalating.
Multiple lower courts have ruled that the tariffs exceed the President’s authority under the International Emergency Economic Powers Act (IEEPA). This has culminated in the Supreme Court agreeing to hear the case on an expedited basis, with oral arguments scheduled for November 5. The core issue is whether the administration has the legal authority to impose such wide-ranging tariffs without explicit congressional approval. The outcome of this case will have profound implications, as a ruling against the administration could invalidate a significant portion of the currently enacted tariffs and upend the nation’s current trade policy.
Government Shutdown
As of this writing, the Federal government appears headed for a shutdown at midnight September 30. Senate Republicans have put forward a bill to keep the government running through November 21 which previously failed on a 44-48 vote. Senate Democrats put forward an alternative that also failed to pass. As a reminder, during a federal government shutdown essential, mandatory and fee-funded programs typically continue operating, things like active-duty military and law enforcement, mail delivery, Social Security and Medicare payments and VA medical facilities. Non-essential services may cease or be limited, things like inspections, national parks staffing, loan processing, and customer service.
There may also be a delay in reporting of economic data. The September jobs report is slated to be released Friday, October 4, but will be delayed if the BLS is shut down. Market participants will likely rely on information gathered from private data sources, such as the ADP Employment Report, until official government statistics resume.
The impact of the potential shutdown will depend primarily on its duration. Over the past 40 years, the government has shut down eight times, a rate of roughly once every five years. The duration has ranged from 1 day to 35 days. Typically, these periods have had only minor economic and market impacts, with the longest shutdown, 35 days, creating a drag of just 0.02% of GDP that year according to CBO estimates. We will be monitoring and communicating as necessary as this impasse unfolds.
Staying Disciplined
We are in a dynamic period for the economy and maintaining a disciplined, diversified approach is essential as a sound long-term strategy remains the best approach for navigating an uncertain landscape. On behalf of our team, thank you for your continued trust.