September 2025 Market Commentary

September 16, 2025

• US signs trade agreements with multiple major trading partners.
• Court rules majority of President Trump’s tariffs are illegal.
• President Trump attempt to remove Fed Governor Lisa Cook from her position.
• US labor market growth decelerates over the summer.
• August Returns: S&P 500 1.9%. Bloomberg US Aggregate Bond index 1.2%

Uncertainty. It has been the watchword of 2025 and remained so in August. For much of the year, uncertainty has been associated with President Trump’s trade policies. However, in August that moderated, replaced by uncertainty around monetary policy and labor markets. Growing signs of weakness in the latter, along with comments by Fed Chair Jay Powell, stoked expectations of a Fed rate cut in September, helping drive positive equity and fixed income market returns.

Trade deals announced in late July and early August between the US and multiple large trading partners helped reduce trade-related uncertainty. Deals with the European Union (EU), Japan, and South Korea set tariffs on imported goods, including autos and parts, at 15%. Trump had previously threatened 25% tariffs on all autos and parts entering the US., along with tariffs ranging from 25-30% for other goods imported from the three countries and regions. Trump also announced 90-day extensions of current tariff rates on imported goods from Mexico and China, allowing time for more comprehensive deals to be finalized. The cumulative effect of those actions provided greater clarity around trade, thereby reducing overall uncertainty. However, at the end of the month, trade uncertainty was renewed after the US Court of Appeals for the Federal Circuit ruled most of Trump’s tariffs, specifically those enacted under the International Emergency Economic Power Act (IEEPA), are illegal. Recognizing its decision will be appealed to the Supreme Court, the Appeals Court stayed its ruling until mid-October.

The US Court of Appeals decision notwithstanding, ebbing trade uncertainty in August was replaced by increased uncertainty regarding the Federal Reserve and its independence. In early August, Fed Governor Adriana Kugler unexpectedly resigned from her position, providing Trump the opportunity to nominate someone to fill the remainder of Kugler’s term which expires in January 2026. Later in August, Trump accused Fed Governor Lisa Cook of mortgage fraud and attempted to fire her, marking the first time in the Fed’s 112-year history that a president has tried to fire a Fed governor. According to the Federal Reserve Act of 1913, which created the central bank for the purpose of overseeing monetary policy, a president many only remove a Fed governor for “cause.” The Act does not define “cause,” nor does it describe a specific method for removal. Legal experts have long interpreted “cause” to mean incompetence, neglect of duty, or malfeasance while in office. In early September, a federal judge blocked Trump’s effort to remove Cook, saying it likely violated both the Federal Reserve Act as well as Cook’s due process rights. Thus far, market reaction to Trump’s efforts to remove Cook has been muted, likely due to the Supreme Court suggesting earlier this year that Fed members enjoy additional protections not afforded to other government officials. That suggestion will almost certainly be tested in the months ahead as the case is ultimately appealed to the Supreme Court.

At the heart of the case rests the notion of Fed “independence,” long considered both sacrosanct as well as vital to the Fed’s mission to craft monetary policy free from political influence or interference. The Fed’s independence is also viewed as essential for financial market stability, the dollar’s dominant position as the global reserve currency, and the country’s ability to issue large amounts of debt to support its deficit spending. To protect against undue political influence, the seven Federal Reserve Governors are elected to staggered 14-year terms with one governor’s term expiring every two years. Currently, two of the seven Fed governors were nominated by Trump in his first term. With the resignation of Kugler, Trump can nominate a third governor. If his efforts to remove Lisa Cook are successful, Trump would be able to nominate a fourth governor.

Economic uncertainty increased in August as incoming data pointed to slowing labor market conditions and rising inflation. Since Trump’s April 2 tariff announcement, widely anticipated consumer price increases have been slow to materialize, resulting in various explanations as to why- businesses continue to work down elevated inventories built up in the first quarter in anticipation of higher tariffs; Trump’s multiple pauses in implementing higher tariffs extended the time until business had to purchase higher cost inventories; a large portion of prices increases have been, and/or will be, absorbed along the supply chain before reaching the end customer; and recent trade deals have resulted in lower tariff rates than initially assumed. Most likely it has been a combination of those factors. Though the worst-case scenario of a sudden, sharp increase in inflation has failed to materialize, recent data points to increasing upward pressure. Since bottoming at 2.3% in April, headline consumer inflation (CP) has steadily increased, reaching 2.9% in August, the highest level since last December. Core CPI, excluding more volatile food and energy prices, has shown a similar pattern, rising from a post-COVID low of 2.8% in the spring to 3.1% in August, tied with July for the fastest pace since February.

As inflation has increased, labor markets have simultaneously experienced a sharp downward shift. In August, just 22K jobs were created, while revised data indicates 13K jobs were lost in June, the first month of outright declines since December 2020. For the three months ending in August, the average pace of job growth was 29K, down from 82K a year ago. At the same time, the average monthly pace of job growth in 2025 has been 75K, the slowest annual pace since 2009. In general, economists calculate the economy must add ~100K new jobs/month to keep unemployment steady. Unemployment in August rose to 0.1% to 4.3% after being range bound between 4.0-4.2% the prior 15 months. Speaking at the Fed’s annual economic symposium in September, Fed Chair Jay Powell, described labor markets as being in a “curious kind of balance” as both supply and demand for workers has slowed. Coupled with rising inflation, Powell said the Fed is in a “challenging situation,” one that might “warrant adjusting our policy stance.”

Markets interpreted Powell’s comments to suggest he might support a rate cut at the Fed’s September meeting. That was reflected by markets pricing in an 86% probability of a September rate cut at the end of August, up from 38% at the start of the month. Following the release of the weak August employment report in early September, those odds increased to 100%, while the odds of three rate cuts by December increased to 73%, up from just 8% at the start of August. Those increased expectations helped drive markets higher over the course of the month with large caps (S&P 500) gaining 1.9%. Small caps (Russell 2000), which tend to be more interest rate sensitive than their large cap brethren, were the largest beneficiary of the increased rate cut expectations, jumping 7.0%. International returns were also positive with developed markets (MSCI EAFE) rising 4.1% while emerging markets (MSCI EM) rose a more modest 1.2%.

Growing expectations of a September rate cut also benefitted fixed income markets as falling yields boosted prices, resulting in a 1.2% gain for the Bloomberg US Aggregate Bond index, the broadest measure of the US fixed income market. The Treasury yield curve saw the largest changes at the front end of the curve and in the “belly”, i.e. the more intermediate part of the curve. Yields on 3-month, 2-year, 3-year and 10-year bills and bonds fell 0.18%, 0.35%, 0.31%, and 0.14%, respectively. Changes at the shorter end the curve reflected increased expectations of Fed rate cuts, whereas the decline in the 10-Year yield reflected concerns of economic slowing.

Munis also enjoyed positive returns as yields experienced similar declines to those of Treasuries. Strong issuance, which has been a headwind to performance all year, continued, exceeding $50B for the fifth consecutive month. However, strong demand helped absorb the supply, preventing downward pressure on prices. Munis ended the month attractively valued with yields at their highest absolute levels in nearly a decade while relative value vs. Treasuries was above its two-year average. A possible slowdown in supply in the final four months of the year could aid future performance.

Investment and insurance products and services are not a deposit, are not FDIC- insured, are not insured by any federal government agency, are not guaranteed by the bank and may go down in value. Information and research contained herein do not represent a recommendation of investment advice to buy or sell stocks or any financial instrument nor is it intended as an endorsement of any security or investment, and it does not constitute an offer or solicitation to buy or sell any securities. It is not possible to invest directly in an index. There is no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. Past performance is not a guarantee of future results. These materials have been prepared solely for informational purposes based upon information generally available to the public from sources believed to be reliable. The views and opinions expressed in this publication are subject to change, at any time, without advance notice or warning.