Markets on the Front Foot: Are Expectations Outpacing Reality?

by Northern Trust, 9/29/25

The U.S. Federal Reserve’s recent pivot marks a turning point in monetary policy. For much of the past year, rate-setters have been fixated on the twin threats of persistent inflation and the risk of overshooting with policy tightening. But fundamental weakness in the U.S. labor market has now tipped the balance of risk for the Fed’s dual mandate — maximum employment and stable prices — towards the former. Rate cuts, once a distant hope for dovish investors, are now firmly back on the agenda as the Fed attempts to move policy closer to what it believes to be “neutral.”

Chair Powell, ever keen to avoid binding commitments, made clear that the path ahead is not set in stone. The door remains ajar for further cuts, to be debated meeting by meeting, with each data release a potential inflection point. This measured ambiguity is by design: the Fed wishes to remain nimble, but the practical effect will be to keep markets perpetually attuned to the cadence of economic signals, with traders scrutinizing every jobs print and inflation gauge for clues.

Consumers, meanwhile, have proven resilient — except the lowest income cohort, who continue to feel the pinch. Higher tariffs pose a challenge to growth, yet robust spending elsewhere suggests the economy can weather these headwinds through the remainder of the year.