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Key takeaways
- The Fed cut interest rates by 25 basis points, with the target policy rate range now at 4.00%-4.25%.
- The updated policy statement introduced new language acknowledging downside risks to the labor market. The dot plot of rate projections now shows 50 bps of additional cuts expected this year, up from 25 bps previously.
- Chair Powell emphasized the considerable uncertainty underlying the Fed’s revised forecasts and signaled that while future rate cuts are probable, their timing will be contingent on incoming economic data.
- We favor asset classes that may benefit from Fed rate cuts, including shorter-duration fixed income and real estate.
- We also see opportunities in equity markets and municipal bonds.
The U.S. Federal Reserve cut interest rates by 25 basis points at its September meeting. Citing increased downside risks to employment despite stable baseline forecasts, the Fed signaled additional cuts ahead as unemployment pressures mount and policymakers navigate heightened uncertainty in the economic outlook.
What happened?
The Federal Reserve cut interest rates by 25 basis points (bps) today, bringing the fed funds rate to a new target range of 4.00%-4.25%. This decision met market expectations and marks the Fed’s first policy rate adjustment since December.
The Fed’s updated economic projections showed only a small upgrade to real GDP growth and no changes to the unemployment or inflation outlooks. However, the policy statement referenced that “job gains have slowed” and acknowledged that “downside risks to employment have risen.” While the baseline unemployment forecast did not change, the heightened focus on potential labor market weakness justified a shift in the dot plot of rate expectations, which now projects an additional 50 bps of cuts this year, up from 25 bps previously.
During his press conference, Chair Powell emphasized the high degree of uncertainty in current conditions, acknowledged that the two sides of the dual mandate are “somewhat in tension,” and observed that “it isn’t incredibly obvious what to do.” Though he downplayed the significance of the updated dot plot, Powell indicated the Fed will continue moving policy “in the direction of neutral” in coming meetings, with the pace determined by incoming data.
We continue to expect 75 basis points of additional rate cuts over the next few quarters. The probability of a cut at the October policy meeting has increased. The Fed’s reaction function has shifted toward greater sensitivity to labor market downside risks, making the next jobs report on 03 October particularly critical for future policy direction.
Economic growth is slowing, but the odds of a recession remain low
The U.S. economy has continued to slow since the July FOMC meeting, though growth remains positive and healthy overall. The labor market has loosened further, and inflation has proven slightly less persistent than anticipated. We continue to expect growth to moderate further through 2025 before rebounding next year.
The August employment report revealed further deceleration in job creation, with the three-month average dipping to a new low of 29,000 net new positions. Unemployment rose to 4.3%, as expected, and broader slack measures suggest modest additional loosening ahead, though conditions remain stable.
The prime-age employment-to-population ratio (which adjusts for demographic shifts) remains near record highs. While job openings declined, the private sector quits rate held steady. We expect unemployment will rise to approximately 4.5% this year, consistent with the Fed’s median forecast.
Inflation presents a mixed picture, with less upside pressure than feared but ongoing acceleration driven by tariff effects. Core goods inflation has increased for three straight months, with additional tariff-related increases likely ahead. Housing inflation, which moderated more than expected earlier this year, accelerated in August. We anticipate core PCE inflation will peak slightly above 3.0% year-over-year by year-end.
We maintain our forecast for approximately 1.0% real GDP growth this year. In 2026, we expect tariff headwinds to diminish while easier fiscal and monetary policy provide support, driving growth higher to around 1.8%. Unemployment should stabilize near 4.5% through this period.
What does this mean for investors?
As the Fed embarks on its renewed easing campaign, we think investors should strategically position portfolios to capture emerging opportunities across asset classes.
In fixed income markets, rate cuts may not necessarily drive long-term yields lower. Persistent inflation risks and historically wide fiscal deficits constrain the benefits of duration exposure in taxable fixed income. We continue favoring shorter-duration sectors that offer attractive income with limited interest rate sensitivity, including securitized assets (such as commercial mortgage-backed securities) and senior loans. Both sectors deliver compelling yields supported by healthy fundamentals.
Securitized credit merits particular attention given its lower rate volatility, relative insulation from tariff impacts and attractive risk-adjusted returns. This sector also presents alpha-generation opportunities within actively managed multisector portfolios. We see value in maintaining exposure to credit investments tied to U.S. housing markets and commercial asset-backed securities financing. Select CMBS investments positioned to benefit from the commercial real estate recovery appear especially compelling.
Private real estate markets present significant opportunities following their cyclical trough. After two years of declines, the sector has posted positive total returns for four consecutive quarters. Recovery drivers include rebounding property values across most global markets, increased transaction volumes and sharply reduced new construction activity.
Historical patterns suggest the next U.S. real estate cycle has begun. The core open-end real estate fund industry has experienced three major cycles over its history, each lasting over 12 years and generating annualized total returns exceeding 10% (NCREIF Fund Index). Two consecutive quarters of positive returns have historically signaled new cycle beginnings – we’ve now seen four. Our global cities approach continues to emphasize markets with educated, diverse populations and strong growth prospects.
Municipal bonds present compelling value after lagging broader markets in 2025. Unprecedented issuance levels – $333 billion through July alone, approaching the prior decade’s $381 billion annual average – have driven spreads wider. While municipal returns typically derive from income, today’s elevated spreads offer meaningful capital appreciation potential as supply normalizes.
The municipal yield curve has steepened considerably as intermediate and longer-term rates have risen substantially. On a taxable-equivalent basis, AAA municipal yields now exceed comparable Treasury rates beginning at the 2-year maturity. BBB rated municipals – the lowest investment-grade tier – offer taxable-equivalent yields ranging from 7.0% to 9.6% starting with 10-year maturities. We anticipate longer-term yields will moderate over time, creating potential price appreciation opportunities.
Despite major equity benchmarks trading at or near record levels, we believe current valuations remain justified by underlying fundamentals. Technology companies have delivered exceptional earnings growth driven by substantial capital investment. The Magnificent 7 stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Tesla and Nvidia) exemplify this strength, posting 26.6% year-over-year earnings growth in the second quarter – nearly double the 13.9% consensus forecast entering the period, according to FactSet. Operating profits for this group have been equally impressive, rising nearly sixfold since 2012 with acceleration over the past three years.
These robust results reflect a global capital expenditure surge that appears to be in its early stages. AI infrastructure spending continues its rapid ascent, with 2025 estimates ranging from $320 billion to $375 billion, followed by projected increases of 10% to 15% in 2026. Software companies are equally committed to AI’s profit potential, with infrastructure software – particularly data and cloud platforms – representing the most direct investment avenue as secular demand consistently exceeds expectations.
The cybersecurity sector should also benefit from AI-driven expansion, as emerging technological complexities will demand sophisticated, AI-enhanced security solutions. While AI-related valuations appear elevated by historical standards, they reflect genuine cash flows, global reach and secular growth drivers. With double-digit earnings gains projected through mid-2026, U.S. technology stocks may continue to both command and justify their premium valuations.
Endnotes
Sources
Federal Reserve Statement, September 2025.
Bloomberg, L.P and S&P Markit.
The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.
Important information on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income.
Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks may be magnified in emerging markets. Asset-backed and mortgage-backed securities are subject to additional risks such as prepayment risk, liquidity risk, default risk and adverse economic developments. The value of convertible securities may decline in response to such factors as rising interest rates and fluctuations in the market price of the underlying securities. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk
As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Real estate investments are subject to additional risks associated with ownership of real estate-related assets, including fluctuations in property values, higher expenses or lower income than expected, and potential environmental problems.
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