Weekly Investment Update (09/19/2025)

The Federal Reserve cut rates by 25 basis points this week, bringing the federal funds rate to a range of 4.00%–4.25%, continuing the rate-cut cycle that began last year. While the move was widely expected, the decision came against a backdrop of surprisingly strong economic data released this week, including better-than-expected retail sales and a decline in both initial and continuing jobless claims. Rather than easing in response to weakness, this stronger data suggests that the Fed is acting preemptively, aiming to support growth as inflation moderates — without waiting for more pronounced signs of economic stress.

From a market perspective, this can be a favorable setup. Rather than reacting to a sharper downturn, the Fed is easing policy while the economy remains on stable footing. If this balance holds —  continued disinflation paired with resilient growth and labor markets — it could prove to be a constructive environment for risk assets, particularly as investors begin to anticipate a more supportive policy backdrop (both monetary and fiscal) heading into year-end.

Inflation Data Keep the Fed on Track for a September Cut

What is happening: The Federal Reserve lowered its policy rate at its latest Federal Open Market Committee meeting, in line with expectations. Chair Powell framed the decision as a “risk management cut” aimed at cushioning the economy from increasing labor market risks. The Fed’s statement highlighted that “downside risks to employment have risen,” even as inflation remains above its 2% target.

The Fed also released updated projections. The September dot plot showed a median expectation for two more cuts before year-end. Looking further ahead, the median federal funds rate projection was lowered to 3.6% for 2025 (from 3.9% in June) and to 3.4% for 2026 (from 3.6%), before stabilizing at 3.1% in 2027–2028. Longer-run estimates remain anchored at 3.0%. The Fed also raised its 2025 GDP growth forecast to 1.6% from 1.4% while leaving its unemployment and inflation forecasts unchanged. Projections for 2026 and 2027 showed stronger growth, lower unemployment, and higher inflation relative to June’s outlook.

Why it matters: The Fed’s move underscores a shift in focus from inflation to the labor market, where job creation is slowing and risks to employment are rising. Powell acknowledged the “challenging situation,” with tariffs keeping inflation sticky while the combination of reduced labor supply alongside softer labor demand is helping to contain unemployment.

The policy path reflects a greater willingness to act preemptively to support growth. While near-term policy is tilting more supportive of growth, we note that longer-term monetary policy does not appear to be racing toward a deeply accommodative stance, given expectations for solid economic growth and lower unemployment in future years. Given the constructive economic and monetary policy backdrop, Bessemer portfolios maintain an overweight to equities and a long-duration stance within fixed income, reflecting our focus on positioning for resilient growth in a gradually easing policy environment.

Consumer Spending Resilient Despite Lagging Sentiment 

What is happening: Recent economic data continue to show a divergence between consumer behavior and sentiment. The August control group retail sales report, which feeds directly into GDP, rose by 0.7% month-over-month, surpassing expectations and above its historical average of 0.4%. Since retail sales data is not adjusted for inflation, part of the August increase may reflect higher prices, though overall, the figures suggest continued healthy consumer spending.

At the same time, the University of Michigan’s consumer sentiment report for September fell about three points from August. While sentiment has improved from April lows, it remains below its historical average. The survey noted particularly weak sentiment among lower- and middle-income consumers, explaining some of the divergence between sentiment and spending as consumers in the top 10% of the income distribution account for an increasingly large share of total spending. In the second quarter of 2025, consumers in the top 10% cohort accounted for 49% of total spending, up from about 42% during the same period 20 years ago.

Why it matters: The divergence between hard data and survey data underscores the bifurcation in consumer strength. While higher-income households continue to drive overall spending, sustained consumption growth depends on labor market conditions. We continue to see signs of a gradual cooling in the labor market with slower job growth and hiring, which weighs more heavily on lower- and middle-income consumers. That said, relief is coming, as the Fed resumes its easing cycle and TCJA tax cut extensions delivering upwards of $150 billion in support through higher SALT deductions, expanded child tax credits, no tax on tips, and other provisions. These measures should help offset ongoing labor market headwinds for lower-income groups.

Overall, these dynamics suggest a consumer backdrop that is increasingly bifurcated yet continues to show resilience. The purchasing power and inelastic consumption patterns of higher-income households provide support for growth, but broader momentum will depend on whether fiscal support and lower interest rates can offset labor market softness and bolster confidence across income cohorts.