THE MACRO RADAR

After nearly two years of hawkish tightening, the Federal Reserve has officially pivoted. In its September 2025 meeting, the Fed cut interest rates by 25 basis points, bringing the federal funds rate down to 4.00%–4.25%. This marks the first rate cut since December 2024, and it’s not just a technical adjustment—it’s a signal. A signal that the Fed is shifting its focus from inflation control to labor market support.

The Federal Reserve’s dual mandate: maintain price stability and maximize employment. For most of the past two years, inflation was the dominant concern. But now, the pendulum is swinging. Chair Jerome Powell recently stated, “Labor demand has softened, and the recent pace of job creation appears to be running below the break-even rate needed to hold the unemployment rate constant”. Translation? The job market is losing steam.

Here’s what triggered the alarm bells:

Even more troubling: the Bureau of Labor Statistics revised its job creation numbers downward by 911,000 for the past year. That’s nearly 75,000 fewer jobs per month than previously thought.

the Fed cut interest rates by 25 basis points to a range of 4.00%–4.25%, its first move this year. The rationale? A cooling labor market and sluggish GDP growth—now projected at just 1.6% for 2025. But inflation hasn’t gone away. It’s still hovering above the 2% target, with some forecasts pushing it to 3.3% by year-end.

This is classic stagflation risk: tepid growth, elevated prices, and rising unemployment. The Fed is betting that easing rates will stimulate hiring and investment without reigniting inflation. It’s a bold gamble.

Stagflation is a policy paradox — solving one problem risks worsening the other. In a normal slowdown, the prescription is straightforward: cut interest rates, stimulate demand, and get growth and employment back on track. In a normal inflationary period, the opposite applies: raise rates, cool demand, and bring prices down.

But stagflation is both problems at once — weak growth and inflation — so the usual tools work against each other:

Every move to fix one side of the equation risks making the other side worse.

The Federal Reserve is effectively boxed in on further rate hikes because the U.S. government’s $37trillion federal debt load makes higher rates fiscally dangerous. Every percentage point increase in rates adds hundreds of billions in annual interest costs, and as low‑rate debt matures, it’s refinanced at today’s elevated yields, causing those costs to compound year after year. Interest payments are already exceeding $1 trillion annually—more than the defense budget—and pushing rates higher would accelerate a debt‑service spiral, widen deficits and force even more borrowing at high rates. These dynamic turns monetary tightening into a fiscal threat, leaving the Fed little choice but to pivot toward easing and, eventually, policies like yield suppression or quantitative easing to contain long‑term borrowing costs.

The Fed’s return to quantitative easing (QE) is not a matter of if, but when. The September 2025 rate cut was the first sign that conventional policy tools are losing their bite. With growth slowing, the labor market softening, and inflation still above target, the Fed is already walking a fine line. But the real constraint is fiscal: the U.S. government’s $37 trillion debt load means higher rates translate into over $1 trillion a year in interest payments — more than the defense budget — and those costs compound as low‑rate debt rolls over at today’s yields. That dynamic makes further hikes politically and economically toxic, leaving the Fed with only two levers to pull: keep cutting short‑term rates and, when that’s not enough, step back into QE. By buying Treasuries and mortgage‑backed securities, the Fed can suppress long‑term yields, ease financing conditions, and stabilize markets — all while indirectly helping the Treasury manage its borrowing costs. In today’s high‑debt, low‑growth world, QE has shifted from being an emergency‑only measure to a recurring feature of the policy playbook, and the Fed’s current trajectory suggests it will be deployed again to prevent a deeper downturn and keep the debt‑service spiral in check.

The 2‑year Treasury yield, the market’s most sensitive gauge of Fed policy expectations, has been sliding — recently around 3.5%, down from over 4% earlier this year. This drop signals that traders are pricing in more rate cuts ahead, reflecting the Fed’s shift from inflation‑fighting to growth‑support mode. The 10‑year Treasury yield — now hovering near 4.05%–4.13% — is the anchor for long‑term borrowing costs worldwide. Mortgages, corporate bonds, infrastructure loans — all key financing channels — are priced off the 10‑year. But if the 10‑year stays elevated despite Fed cuts — as happened earlier this year — it signals persistent inflation fears and heavy Treasury issuance, which can blunt the stimulative effect of lower short‑term rates.

After contracting in 2022–2023, U.S. M2 money supply is climbing again — up over $1.2 trillion in just a year. Rate cuts make borrowing cheaper, encouraging credit creation and boosting liquidity. Rising money supply historically correlates with asset price inflation — from equities to real estate — but also risks re‑stoking consumer price inflation if demand outpaces supply. Globally, more dollars in circulation can weaken the USD, ease debt burdens for emerging markets, and fuel commodity rallies.

A weaker U.S. dollar is one of those macro shifts that ripples far beyond currency markets — it reshapes trade flows, capital allocation, and investment returns across the globe.

The Fed’s pivot is loosening financial conditions: short‑term yields are falling, liquidity is rising, and the long end of the curve is in play. This is a market environment where liquidity — not fundamentals — could dominate price action. For investors, that means playing both offense and defense: own assets that can ride an inflation wave but keep dry powder for dislocations if growth stalls harder than expected.

If the RADAR tells us what’s happening, the GPS tells us how to navigate it. In THE MACRO GPS, we’ll translate these macro shifts into concrete positioning strategies — which sectors to overweight, how to manage duration, where to find inflation‑resilient income, and how to hedge against a weaker dollar. Think of it as turning the weather report into your actual flight plan.

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