September was a month with relatively little market turbulence, and the S&P climbed steadily higher on confirmation of a softer outlook from the Federal Open Market Committee (FOMC)‡.

Inflation data continues to follow the expected path higher, presumably due to tariff pressure. Both Core CPI and Core PCE have now pushed up to roughly 3.0% annual growth rates, well above the 2.00% historical target projected by the FOMC.

It is encouraging that inflation is moving very slowly higher, and thus far is following the path estimated by the major research organizations. Because it is moving slowly and not spiking higher, longer-term inflation expectations (5–10-year, survey-based forecasts) are staying relatively well anchored in a moderate range, implying that the Fed will be able to effectively manage inflation during the upcoming cycle. Because the global markets are (at least currently) comfortable with the Fed’s ability to manage whatever inflation arises due to tariffs, the FOMC has chosen to focus less on inflation and more on helping stimulate softening in overall economic activity.

As was projected at August’s Jackson Hole conference, the FOMC re-initiated their easing campaign in September, cutting the overnight rate to 4.25%. While inflation is still a bit spicy, the Fed is more concerned with softness appearing in the payroll data over the last several months. The second quarter GDP was confirmed at a very brisk 3.8%, but it is presumed that a large portion of the activity was due to “front-loaded” import orders, seeking to front run impending tariff increases.

What’s next in 2025: Economic highlights

The consensus estimates for the remainder of 2025 are for GDP falling back to well-below normal, likely in the 1.5% range. Consumption has held relatively firm but appears to be driven primarily by higher wage earners. Middle and lower-income households appear to be coming under increasing financial pressure. Payroll data have been exceptionally weak of late, and the FOMC hopes that moderately lower rates will help bolster activity back up toward normal (around 2%) heading into 2026.

The markets were already rallying in anticipation of encouraging news from the Fed is not unanimously expecting a steady series of rate cuts. FOMC. After the rate cut was announced, the assumption of a steady series of further rate cuts helped spur the S&P 500 even higher. However, during the final days of September, concerns around the outlook for inflation and interest rates cooled market sentiment.

As FOMC meeting minutes became further scrutinized, it became clearer that The Fed “Dot Plot” clearly illustrated that half of the committee expects only one, or even zero, additional cuts in 2025.

As the markets realized there will be spirited debate amongst the Fed over upcoming rate movements, some of the gains from the mid-month euphoria were given back. The S&P sold off modestly during the last week of the month and interest rates pushed back higher. It was still a very profitable month, with the S&P posting a roughly 3.5% monthly gain, taking year-to-date (YTD) returns to more than 14%.

Interest rate forecast

We expect the Fed to continue to look past the inflation issues, focusing on softening economic fundamentals to rationalize further rate cuts. We’ve been forecasting overnight rates to end 2025 at 4.00% (with one more cut), and the latest output from the Fed supports that outlook. We expect 2-3 more cuts in 2026.

Moderately lower rates should help businesses feel more confident heading into 2026, which could improve the outlook for capital expenditures – bolstering activity, jobs and the overall economy. The ongoing risks will be two-fold:

  • Inflation could push sharply higher due to tariffs, stopping the Fed easing campaign, or
  • The very weak payroll data could foretell a serious economic slowdown, pushing consumption and activity sharply lower before the Fed can rescue the economy via lower rates.

We do not foresee either of those outcomes as the most likely base-case scenario at this time, but they are the primary risks headed into next year.

Cautious optimism ahead

We are slowly growing more optimistic, but are still cautious about the potential risks to the economic

and market outlook. The Fed is riding a razor’s edge in managing conflicting issues. Inflation is too high and moving higher, while the economy (especially the labor market) looks to be weakening. We are hopeful that the FOMC will adroitly massage rates lower in a manner that keeps the delicate economic situation in balance moving into next year — but wish to see a few more months’ data before we consider a more bullish mindset.

In summary, market resilience in 2025 continues to surprise to the upside. U.S. economic activity appears to be tapering off, and the labor market is clearly in a weakened state. Inflation is too high and likely headed higher — but the FOMC believes it will taper off on its own in 2026. The equity markets have received confirmation that interest rates are headed lower again, but the magnitude and speed of the rate cutting campaign is still hotly debated within the FOMC.

Given the multiple risks to the economy and lofty valuations in the equity markets, we continue to remain neutral in our risk allocation – believing that the time for heavier risk exposure has yet to present itself.

We are here to provide our clients with peace of mind about their financial future. Anchoring to a sound, long-term financial plan will help everyone weather storms like these. We will remain disciplined, and consistent in our strategies and philosophies. We are confident that together we will manage our way through this (hopefully brief) challenging time.

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Disclosures and Important Considerations

UMB Investment Management and UMB Private Wealth Management are divisions within UMB Bank, n.a. (a subsidiary of UMB Financial Corporation) that manage active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts and individuals. UMB Financial Services, Inc., Member FINRA, SIPC, offers broker/dealer and investment advisory services to retail and institutional investors and is also a subsidiary of UMB Financial Corporation and is an affiliate of UMB Bank.

Note that “we” and “our” used throughout this letter refers to UMB Investment Management’s thoughts and expectations.

This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements and projections in this report are based on the opinions and judgments of UMB Investment Management and the information available as of the date this report was published and are subject to change at any time without notice. UMB Investment Management obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive, and UMB Investment Management does not guarantee that it is accurate. All investments involve risk, including the uncertainty of dividends, rates of return and yield and the possible loss of principal. Past performance is no guarantee of future results.

You should not use this report as a substitute for your own judgment, and you should consult with professional advisors before making any tax, legal, financial planning or investment decisions. This report contains no investment recommendations, and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice.

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