Fed Cuts Rates and Signals Uncertainty Ahead, While Consumer Spending Holds Steady

Matthew Rubin Chief Investment Officer

 

1. The Fed lowered rates by 25 basis points and signaled the potential for further easing while projecting modestly stronger growth and inflation.
2. Policymakers signaled uncertainty about the pace of easing, leaving markets looking toward upcoming economic data.
3. Retail sales posted its third-straight monthly gain, suggesting household demand remains steady for now.

 

1. Fed Delivers Quarter-Point Rate Cut, Updates Outlook

Last week, the Federal Reserve reduced its benchmark interest rate by 25 basis points, bringing the federal funds target range to 4.0%–4.25%.¹ The move was widely anticipated and marked the first policy adjustment since December. Alongside the decision, the Fed released its updated economic projections, which included the “dot plot” showing policymakers’ expectations for future rates.² Compared with the June forecast, the latest dot plot suggested the possibility of one additional rate cut before year-end. It also reaffirmed expectations for another cut in 2026, which would lower the funds rate into the 3.25%–3.50% range.²

Markets, however, continue to price in a faster pace of easing, with futures pointing to rates falling below 3% over the same horizon.¹ That gap between the Fed and market outlook has narrowed in recent weeks, but remains notable. The Fed also revised its economic forecasts, projecting slightly stronger growth, marginally lower unemployment, and a modest uptick in inflation compared to June’s release.² Taken together, the rate cut and projections matched market expectations, resulting in only a muted response from both stocks and bonds.

Still, equities managed to post modest gains for the week, with the S&P 500 edging higher in Technology, Growth, and High Beta sectors, while defensives such as Health Care, Consumer Staples, and Low Volatility lagged.¹ Small caps also outperformed, with the Russell 2000 extending its recent stretch of gains over the S&P 500.¹

2. Fed Offers Limited Guidance on Path of Rate Cuts

Last week’s Federal Reserve meeting offered little clarity on the path of monetary policy. Officials were divided about how much easing might be needed in the months ahead. A slim majority of policymakers projected three quarter-point cuts, while a significant minority saw room for only one or two.³ This split highlighted the uncertainty facing the central bank as it weighs inflation, employment, and broader economic conditions.

Chair Powell reinforced that sense of ambiguity during his press conference, emphasizing that no outcome could be ruled out and that future decisions would hinge on the incoming data. With limited forward guidance, markets are now left to interpret each new report on jobs, prices, and growth as a potential signal for policy direction.

Investors currently assign a high probability, roughly 80% to 90%, that the Fed will deliver quarter-point cuts in both October and December.³ However, those expectations remain sensitive to the flow of data. Signs of softer economic activity could solidify the case for further easing, while evidence of labor-market resilience might cause investors to scale back those bets. The result is an outlook that may bring volatility in the months ahead.

3. Consumer Spending Shows Summer Resilience Despite Slower Growth

Consumer spending has been subdued this year, with household consumption rising at just a 1% annualized pace in the first half of 2025, compared with about 3% in 2024.⁴ The slowdown reflects softer job and income growth alongside weaker sentiment. Yet more recent data point to some stabilization. The latest retail sales report, released last week, showed a third consecutive monthly gain. Headline sales climbed 0.6% month-over-month from July, while the control group, often seen as a better gauge of underlying demand, rose 0.7% month-over-month.⁴ In addition, earlier figures for July were revised upward, adding to the sense of firmer momentum.

Taken together, the data suggests that households are still spending despite headwinds, providing some reassurance to the Federal Reserve as it calibrates monetary policy. The resilience stands out, given concerns about slowing employment and rising costs. Still, risks remain. Higher tariffs could result in higher consumer prices, eroding purchasing power and weighing on demand in the months ahead. For now, though, the recent strength in retail activity hints at a household sector that remains a stabilizing force for the broader economy.

For the period ending 9/19/25.
* Small-cap stocks are represented by the Russell 2000^® Index. International stocks are represented by the MSCI EAFE. Bonds are represented by the Bloomberg US Aggregate Bond Index. Oil is represented by WTI Oil (West Texas Intermediate Oil), a benchmark for light, sweet crude oil and a primary measure for pricing oil contracts and futures in the U.S.

Sources
¹ FactSet
² U.S. Federal Reserve
³ Bloomberg
⁴ Haver

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