TSP Report October 2025
Facts:
- The Federal Reserve cut its benchmark “Federal Funds Rate” range from 4.25%-4.50% to 4.00%-4.25%.
- The G Fund rate, which can be influenced by Federal Reserve policy, fell by 0.125% in September to 4.250%.
- The unemployment rate ticked up to 4.3% while job growth continues to soften. Evidence of substantial layoff activity remains largely absent.
- The US Purchasing Managers Index (PMI) fell by one point to 53.6% in September but remains in expansionary territory.
- The S&P 500 (C Fund) increased by 3.65% in September and is up 13.53% year-to-date.
Assessment:
The first rate cut since December 2024:
The Federal Reserve announced a 0.25% interest rate cut on September 17th and set the stage for another 0.50% of cuts through year-end. They cited continued progress toward bringing inflation down to its 2% target, as well as emerging weakness in the labor market (discussed below), as evidence for transitioning monetary policy from “restrictive” to more “neutral.”
Rate cuts can benefit the overall economy by decreasing the cost of financing and obtaining loans. Lower rates increase general business profitability while also making it easier for consumers to make purchases (cars, homes, etc.) with more favorable loan terms and lower monthly payments.
Interest rate cuts also impact investment performance. Overall, they tend to be good for stocks, which helps explain the S&P 500’s (C Fund) sharp rally from August 22nd through September. This is when Fed Chairman Jerome Powell first hinted that rate cuts were coming. Bonds (F Fund) also tend to perform well when interest rates fall, although this can be a double-edged sword as price appreciation can be diminished by lower future yields. In other words, let’s say you purchased a bond that’s locked in at 4.5% for two years. If rates fall, your bond is very attractive to own since it has a higher rate, so it can sell for a premium over other bonds. After it matures, however, you may have to reinvest your proceeds at current market yields, which may be lower. The G Fund, on the other hand, does not have price fluctuations and enjoys more stability, but it does have a yield that’s calculated based on intermediate- and longer-term Treasury bond yields. Rate cuts may cause the G Fund rate to edge lower over the near term.
Slow to hire, but slow to fire:
The Federal Reserve cited emerging labor market weakness as a motivator for cutting rates. Indeed, the job market has slowed. In August, the Bureau of Labor Statistics indicated not only fewer jobs added versus expectations during July, but also downwardly revised previous reports for May and June. The net effect of the revisions was that 258,000 fewer jobs were added than originally estimated. In September, another report downwardly revised the estimate of jobs created between April 2024 and March 2025 by 911,000.
Lackluster job creation is less than ideal, but it doesn’t signal economic malaise on its own – especially in the absence of layoffs. To date, layoff activity has been muted. For one, the number of people filing for unemployment insurance for the first time remains not far off from multi-year lows. The absolute number of layoffs has inched up in the past couple of months but is still below levels observed in 2023 and 2024, and far below levels seen in previous recessions.
The current state of the labor market can perhaps best be described as one where employers are “slow to hire, but slow to fire.” To wit, recent reports from the Institute of Supply Chain Management indicate a general hesitation to expand business operations, especially in manufacturing. This includes hiring. Tariffs and policy uncertainty seem to be the most common reasons for businesses choosing to “tread in place” at this time.
Government Shutdown:
Top of mind to federal employees is the ongoing government shutdown, which started on October 1st. This shutdown was caused by Congress failing to pass a continuing resolution by September 30th to keep government operations funded and is leading to many temporary furloughs and delays in employee pay.
Shutdowns can be extremely stressful for federal employees, but investment markets don’t usually react much to them. In fact, Kiplinger points out that the average S&P 500 return during the 22 shutdowns since 1976 has been nearly flat (+0.3%). Long-term effects appear minimal as well, with the 12-month historical S&P 500 return following a shutdown averaging +12.7%.
Bottom Line:
Interest rate cuts should be good for the economy, bonds, and likely stocks. And despite policy uncertainty and slower job creation, many businesses are posting record profits in 2025. Government shutdowns should also not put the current bull market at risk. We expect falling rates to fuel continued momentum, giving markets and the economy a welcome tailwind as we enter the final quarter of the year.
If you have any questions, feel free to contact me.
Email me here – stephen@stephenzelcer.com
