We have long thought the Fed would be the key focus of investors between now and the end of the year. So, let’s see what the Fed is looking at and where it is likely to go from here.
The Fed has a dual mandate focused on employment and inflation. Currently, there is weakness in job growth at a time when inflation has been ticking up, mainly due to the impact of tariffs. But as highlighted in Chairman Jerome Powell’s speech at Jackson Hole at the end of August, the Fed is now clearly focused on the labor market.
In his post-meeting press conference, Powell commented that this cut was designed to keep the labor market from softening further. This approach is similar to what the Fed did last year, cutting rates in September and December by a combined 75 bps when job growth began to slow.
The inflation picture is different than it was a year ago. So far, however, the Fed has seen less of an impact from tariffs on prices than it anticipated, as companies don’t appear to be passing on the full amount to consumers. This should lead to a more muted inflation picture and allow the Fed to continue to focus on the labor market as needed.
Going into Wednesday’s meeting, there was some potential that the Fed might not be aligned on its view of the economic backdrop and what it meant given opinions on both sides of the rate cut debate. Still, the final decision had broad support. Newly confirmed Governor Stephen Miran dissented in favor of a 50 bp reduction. But the rest of the voting members supported the decision, including Governors Waller and Bowman, who had dissented in July in favor of cutting rates at that point.
Although there seemed to be a consensus on Wednesday’s decision, that might not be true as we look ahead. As seen in the updated dot plot illustrating each individual’s view of where rates are headed, other than the outlier, there is a fairly even split on the committee about the need for further rate cuts between now and the end of the year.
FOMC Participants’ Assessments of Appropriate Monetary Policy: Midpoint of Target Range or Target Level for the Federal Funds Rate
Source: Federal Reserve (as of 9/17/2025)
Chairman Powell’s comments about the labor market can certainly be seen as dovish for the future path of interest rates; however, he did address the lack of consensus seen in the members’ projections by saying that it is “not incredibly obvious what to do next.”
The chairman wouldn’t commit the Fed to a path forward on rates, and the updated dot plot indicates that further decisions could garner more debate. Despite that, the market quickly concluded the Fed will reduce interest rates at both the October and December meetings—and they don’t think the October meeting will be particularly controversial.
Source: CME Group (as of 9/18/2025)
According to market participants, the chance the Fed will cut rates at its October meeting is roughly 85 percent. We also believe that another 25 bp rate reduction is the likely outcome of the October meeting. There is only one update to the employment outlook between now and then, which will come on October 3. We don’t think that report will change the overall picture of a slowing jobs market, and the Fed will want to make sure it doesn’t continue to deteriorate by easing further.
There are two main drivers of stock market valuations: interest rates and corporate earnings. Interest rates are moving lower. Corporate earnings expectations have been moving higher.
Source: FactSet (as of 9/12/2025)
While we can certainly experience volatility in the short term (we saw that during the post-meeting press conference), this combination should be supportive of equity markets as we move through the end of the year. We continue to believe that the market should experience more breadth as rates move lower. Given that, our view continues to be that diversification across asset classes is the best approach to portfolio construction.