In Q3, it became clear that the US economy was slowing. Labor market signals pointed to a weakening in private sector jobs. The Federal Reserve decided to restart its easing cycle, delivering a 25 basis point rate cut in September even as inflation stayed above the 2% target. Adding to uncertainty, domestic political discord led the US government to shut down as the quarter ended, at midnight September 30.
Financial markets were undeterred. US equity markets hit new record highs during Q3. The S&P 500 was up by just over 8% in the quarter, for a jump of nearly 15% so far this year. The US also outperformed other equity markets, as the dollar held broadly steady, in contrast to its 10% decline in the first half of the year.
Against this backdrop, RockCreek is looking at three major themes for the rest of 2025:
New era for the Fed: how far and fast will it cut rates?
The Fed is expected to deliver another 50 bps in policy rate cuts between now and the end of 2025. Markets expect more cuts in 2026, despite above target inflation. As Jerome Powell’s term as Chair draws to a close, divergence is growing among members of the policymaking committee.
Jobs, immigration and inflation.
The labor market is weakening in terms of job growth. But is that because of lower demand, with rising unemployment on the horizon, or lower supply as immigration has ground to a halt? There are different implications for growth and inflation.
AI: revolution or evolution?
Many in Silicon Valley expect revolutionary changes from early adoption of a dramatically new technology. Others point to the slow diffusion of past technologies, from the steam engine to electricity. Yet others think of an AI bubble analogous to the dot-com boom and bust, although with more “real” investment that will survive and be useful, even if some of the companies now rushing into AI-related investments, including data centers, may lose money.