Macroeconomic Outlook as of October 2025
1. Federal Reserve Policy & Interest Rates - Fed has begun the easing process, we expect modest cuts to continue as economic risks of a slowing economy outweigh inflation concerns.
- The Federal Reserve has already begun cutting rates. For example, a cut was made in September 2025 as the Fed shifts from fighting inflation to supporting jobs.
- For the next meeting (Oct 28-29), markets are pricing in about a 25 bps cut (to ~3.75–4.00%) rather than a larger 50 bps move.
- Data uncertainty is elevated: the current US government shutdown is delaying key releases (jobs, CPI), which complicates the Fed’s decision-making.
- Key risk: If the Fed maintains restrictive policy too long while the economy weakens, growth could be impaired. Equally, cutting too quickly while inflation remains sticky could reignite
2. Inflation Dynamics - Inflation is sticky (around 3%) and likely to stay above historical 2% target. Challenging times for traditional fixed income positioning continue.
- Latest official data: Annual CPI rose ~2.9% in the 12 months ending August 2025 (up from 2.7%). Core inflation (ex-food/energy) is expected to hold near 3.1% in September.
- While “headline” inflation is at moderate levels, the trend is upward, and with shelter and service inflation still sticky, there’s little comfort that inflation will drop below target quickly.
- The upcoming September CPI release is delayed because of the shutdown — meaning there is a “data-blind” period for inflation.
- Deflationary pressures: Weakening labor market, productivity gains, global slack.
- Inflationary pressures: Fiscal deficits remain large, rate cuts increase risk of reheating, global supply chain/tariff risks remain.
- Implication: Inflation is likely to remain elevated (2.5-3.5 %) through the near term and may decline only slowly toward the Fed’s 2% target. Fixed income real returns remain pressured.
3. Labor Market & Economic Growth - Expect a continued cooling of the labor market (rather than a crash) and modest growth. The chance of a shallow technical recession has increased given weak momentum, policy drag, and external risks.
- Labor market: For August 2025, non-farm payrolls increased by only ~22,000 and the unemployment rate was 4.3% – signaling clear softening.
- A government shutdown adds risk: data flows are impaired, consumer/business confidence is weakening.
- If corporate investment stalls, inflation remains stubborn and policy stays restrictive, then growth could slip further.
4. Government Policy: Tariffs, Tax Reform, and Deficits - Policy direction will likely favor tax extensions and rate cuts over fiscal restraint.
- The US federal government is currently in a shutdown (beginning Oct 1 2025), which is delaying economic data releases and adding policy risk.
- Tariffs remain a wild card: While we expect tariffs to be used more as bargaining chips than structural impediments, escalation remains a risk.
- Tax policy: Extension of prior tax cuts remains the base case. Broader tax reform appears unlikely in the near term given political gridlock.
- Fiscal deficits remain large; the debt burden provides an inflationary risk and limits scope for future constructive fiscal stimulus without adding inflation pressure.
5. Investment Strategy Implications - Allocations continue toward quality, innovation, and alternatives amid elevated inflation and policy uncertainty.
- Fixed Income: Continue to favor shorter durations given policy uncertainty and inflation risk. Longer-dated bonds remain less attractive until inflation expectations decline and policy path becomes clearer. Real‐return (inflation‐adjusted) securities may be more interesting, but still challenged if inflation persists.
- Equities: Quality companies with strong cash flow and pricing power remain key. Innovation/technology exposures still compelling given secular themes. But valuations are elevated and growth is slowing, so selectivity is critical.
- Alternative/Strategic Assets: Given inflation and policy risks, diversifiers (real assets, alternatives) continue to merit consideration.
- Digital Assets (e.g., Bitcoin): If you still view them as strategic (as we do), the current volatility and policy backdrop may make them more interesting from a diversification/long-term adoption standpoint—but they require higher conviction and tolerate higher risk.
6. Technology Leadership & Market Composition - Innovation continues to be a key driver of long-term returns (AI, quantum, digital assets).
- While the “Magnificent 7” (or similar high-flyers) still dominate headlines, look for broader participation—mid-cap companies gaining scalable moats.
- Given slower growth and elevated valuations, ensure portfolio companies have strong fundamentals, scalability, and resilience in a slower growth regime.
- Execution risk matters more than ever: whether companies can deliver in a more challenging macro environment.
7. Geopolitical & Data/Risk Ambiguities - Geopolitical risks (tariffs, conflicts) remain present and can trigger short‐term volatility—though so far markets are absorbing shocks relatively quickly.
- A new friction point: the data blackout caused by the shutdown means the Fed (and markets) are operating with less clarity (“flying blind”).
- While fundamentals still drive the medium‐term outlook, the combination of policy discretion, data gaps, and geopolitical flare-ups means the risk premium in portfolios probably should be higher.