October 2025 Commentary And Economic Outlook

2025-10-31 03:55:00 ET

Economy

• The presser was hawkish with Powell emphasizing that a December cut was by no means assured. Stock and bond markets are falling.

• The Fed cut rates as expected by 25bp and also announced the end of its balance sheet reduction also as expected. There was a surprise dissent to the cut by Jeffrey Schmid of the Kansas City Fed with an expected dissent favoring a 50bp cut by Stephen Miran. The statement was largely unchanged with no indication of future rate cuts. The bond market traded off slightly as the dissent was a negative, and the stock market was largely unchanged. We continue to expect a December rate cut and three more cuts in 2026 to get the Fed funds rate to the neutral rate of 2.75%. We project that core PCE will decline to the 2% area by the end of 2026 as the shelter component of CPI has finally started to reflect the decline in market rents. In fact, our real-time measure of inflation utilizing market rents has already declined to the 2% area for core PCE.

• Friday’s inflation print was very bullish, as the critical owner’s equivalent rent component declined to only .1% vs. .4% in the prior month and 3.8% Y/Y. This decline is critical as it finally reflects market rent declines and implies that core PCE will decline to the Fed’s arbitrary 2% target by the end of 2026 as measured shelter inflation finally reflects the decline in market rents.

• The monetary base is the critical leading indicator of inflation and GDP growth. M1 and M2 have become outdated indicators after the GFC, as banks now have massive excess reserves, so the Fed can no longer control the size of bank balance sheets to restrict credit. In addition, non-bank lending has grown exponentially, further limiting the importance of M1 and M2 relative to the monetary base.

  • The monetary base is flat Y/Y vs. a normal growth rate of 5%, which is deflationary and could lead to a recession.

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