Market Thoughts: And the beat goes on

The Fed and European Central Bank (ECB) delivered again as expected. The Fed continues to cut rates, but chair Powell indicated another cut in December is far from certain. The ECB remains on hold. Each faces what I’ll charitably call unique challenges.

The Fed’s flying blind as it relates to having hard economic data to anchor on for rate decisions. Thank Washington and the government shutdown. The ECB’s stuck between a policy rock and hard place. Anemic growth and sticky inflation. What’s the more pressing issue?

The ECB has a growth problem they need to address. They’re at their inflation target. While there are great expectations for German fiscal spending ahead, big promises to spend haven’t historically resulted in big spending. This time may be different. Or not.

Give credit to the FOMC for leaning into easing this week. They’re concerned about weak labor market growth. Policy rates are high. While inflation’s sticky—and likely to move a bit higher before leveling off—the Fed is proving flexible in reaching their 2% inflation target. Pragmatism prevails.

The Fed backed away this year from the flexible average inflation targeting (FAIT) policy framework announced in 2020. Under FAIT they shifted to targeting an average inflation rate of 2% over time. FAIT proposed greater tolerance for drift above 2% to make up for periods of low inflation. It wasn’t well-suited for high inflation environments…

In a ‘normal’ economic environment, policy flexibility keeps the economy in motion. We’ve seen that play out over the past few years. Tapping the brakes works better than slamming them unless you’re about to crash into a wall of inflation. You then need to firmly hit the brakes. Lesson learned.

For inflation hawks—I count myself as one—there’s nothing good about runaway inflation. I’d say the same about deficits. FAIT allows for smoother economic transition, when not facing roaring inflation. In spirit it’s being practiced today. The U.S. economy can run for a while with 2.5% to 3% inflation. It’s where we find ourselves.

Investors are penciling in more rate cuts through the first half of next year. That’s helping to keep risk assets well-supported. As the expression goes, don’t fight the Fed. At least until you have to.

The longest government shutdown was in 2018-2019. It lasted 35 days under the first administration of Donald Trump. We’re now past the second longest shutdown. That lasted 21 days under Bill Clinton. The Congressional Budget Office (CBO) estimated that a six week shutdown would lead to about $28bn in lost output, which would largely be recovered when the government reopens. Markets haven’t really reacted to this one. We’ve become numb to Washington not doing its job, embarrassing as it is to write that.

October consumer confidence modestly fell from upwardly revised September data. As the shutdown drags on, many federal workers and government contractors go unpaid. That’s spilling slowly into the broader economy. The Conference Board’s read on future conditions moved lower in October, inflation the greatest concern. Another key issue? The government shutdown.

Incentives drive outcomes. A continuing resolution to reopen the government will eventually pass when we’ve hit maximum pain. St. Vincent’s song “Pay Your Way in Pain” seems a fitting backdrop, the struggle between dignity and subsistence.

Democrats want to extend federal subsidies for healthcare provided under the Affordable Care Act. You’ll be reading a lot more about the negative impact on households. Red and blue alike. According to the CBO, extending subsidies is expected to cost something like $30bn over the coming year. The equivalent of about a month of federal government civilian wages.

Funding for the Supplemental Nutrition Assistance Program may run out shortly. Again, a blue and red household issue. With a wall of political pain approaching, compromise will be found. There isn’t a choice. Alligator hands in Congress is unacceptable. I’m rounding up in my word choice of unacceptable.

In the interim, earnings move higher. Companies in aggregate are beating forecasts that were already revised up coming into this earnings season. High single-digit growth targets seem poised again to print in the low double digits. Markets will anchor on that to help validate multiples.

With the Fed cutting rates, robust earnings, retail investors as better buyers and corporate buybacks circling, markets appear easier to push higher than into a correction. The one thing that might derail animal spirits? Congress not doing its job. And the beat goes on…

My next note will be the week of November 10th.

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 10/30/25.

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