October Volatility Meets a Fed Pivot
Subtitle: Markets want relief, the economy wants stability; October will decide which one gets it first.
The market just got the first rate cut of this cycle and it came with a message. The Federal Reserve lowered the federal funds rate 25 bps to a 4.00%–4.25% target range and explicitly flagged rising downside risks to employment. Translation: the inflation fight isn’t over, but the jobs market now matters more to policy than it did a few months ago. Quantitative tightening continues in the background. One governor (Stephen Miran) even dissented for a bigger half-point cut, underscoring the shift toward easier policy as labor softens.
That cut landed into a mixed macro tape: core inflation is sticky, growth just rebounded in Q2, retail sales surprised to the upside, and manufacturing is still contracting. October’s reputation for drama doesn’t help the mood.
Let’s parse what actually matters.
What the Fed Just Did and Why
The FOMC’s statement framed the cut as a response to “elevated uncertainty” and a balance of risks that has tilted toward the employment side of the mandate. The committee will go meeting-by-meeting, watching the incoming data and keeping QT in place. That’s important: it’s not “all-clear” easing, it’s risk management—easing at the margin while preserving optionality if inflation re-accelerates.
The latest Summary of Economic Projections puts the median year-end funds rate around 3.6% (midpoint), with unemployment peaking near 4.5% and core PCE drifting down toward 3.1% by year-end. In other words: the Fed sees a glide path, not a cliff.
The Data the Fed Is Reacting To
Inflation: Two lenses matter. The market tracks CPI; the Fed lives in PCE. CPI for August ran 2.9% y/y headline and 3.1% y/y core, still above target and a touch firmer lately. PCE for July (the freshest we have as of this writing) was 2.6% y/y headline and 2.9% y/y core. Directionally, inflation has cooled a lot from the highs, but progress has flattened with pockets of stickiness in services.
Jobs: The August jobs report showed the unemployment rate at 4.3% with +22,000 nonfarm payrolls; soft, but not recessionary. JOLTS data for July showed 7.2 million openings; about one unemployed worker per opening, well off the extremes of 2022 but not weak in absolute terms. The labor market is healing toward balance, with momentum cooling. That’s exactly the backdrop that invites an insurance-style cut.
Growth: Real GDP bounced +3.3% (annualized) in Q2 after a weak Q1 print. Under the hood, the rebound leaned on imports unwinding and steady consumer spending, more of a stabilization than a boom. High-frequency GDP trackers put Q3 growth around the low-3% range, but those move with each data release.
Spending and Industry: August retail sales surprised to the upside at +0.6% m/m (and +5.0% y/y), reminding everyone that the U.S. consumer still has gas in the tank; unevenly. Meanwhile, the ISM Manufacturing PMI improved to 48.7 but remains in contraction. Services (not shown here) are holding up better than goods.
Put together: inflation is sticky but not spiraling; jobs are softer but still functioning; growth is positive but not roaring. That’s why the Fed cut once, left QT on, and is non-committal about the path: it’s a soft-landing attempt with airbags deployed.
What This Mix Means for Markets
Markets don’t trade the level of data, they trade the change and path.
Rates & credit: A downshift in the policy rate should, at the margin, ease financial conditions, especially if the market extrapolates a few more cuts into 2026, as the SEP hints. But because inflation is still above target, the Fed is unlikely to slam the gas pedal. That usually means gradual relief for duration and credit, not a straight-line rally.
Equities: The “good” market setup is cooling inflation, stable (not collapsing) jobs, and a Fed that’s easing without signaling panic. The “bad” setup is an inflation re-acceleration (which would re-price the path of policy higher) or a sharp jobs deterioration (which would crush earnings expectations even if rates fall). Right now, we’re threading the needle between those two.
Earnings: With top-line growth slowing and wage pressures easing only gradually, margins will be watched closely. The best-positioned companies are those with pricing power and cost discipline; the worst are the ones trapped between slowing demand and inflexible cost structures.
Positioning: After a big multi-year run, market breadth and leadership matter more than ever. In late-cycle tapes, quality balance sheets and steady free cash flow usually outperform story-only growth or high-leverage cyclicals.
What’s “Good” vs. “Bad” for Markets from Here
Good (near-term):
Core inflation trending lower (or at least not re-accelerating). CPI and PCE cooling keeps the Fed cutting cautiously.
Labor softening gradually (more openings per unemployed is not a risk; fewer could be). A glide path reduces recession odds.
Retail sales normalizing, not collapsing; suggests demand is slowing but intact.
Bad (near-term):
Hot inflation prints (services, rents, insurance) that force the Fed to pause cutting or talk tougher again.
A jump in unemployment or multiple weak payrolls that trigger earnings downgrades faster than lower rates can help.
Oil or tariff shocks that lift headline inflation and squeeze real incomes. (We’ve already seen tariff-related pass-through in PCE this summer.)
Why October Feels Terrible and What the Stats Actually Say
October has hosted some of the market’s most infamous moments (1929, 1987, 2008), so it feels scary. And yes, it’s the most volatile month on record: since WWII, average October volatility is ~35% higher than the other months. But on average, October’s return is positive, roughly ~0.9–1% over long windows, so the “October is terrible” trope is more about big events than a persistent negative seasonal.
That nuance matters for behavior. When investors enter October expecting trouble, the tape becomes headline-sensitive. Small disappointments get magnified. But October is also famous as a turnaround month, capitulation and basing often happen here, setting up the stronger November–April seasonal stretch.
How I’d Frame the Outlook
Policy: The Fed has started the easing cycle, but slowly and with QT still running. Expect a data-dependent cadence, not a pre-announced path. The SEP implies policy could drift toward the mid-3s over the next year if inflation cooperates and growth slows, but the bar for faster cuts is a weaker labor market.
Economy: The base case is slower, not recessionary growth, helped by a resilient consumer (with mixed depth beneath the averages) and cooling goods inflation offset by sticky services. Watch core PCE, claims, and retail control for inflection.
Markets: This is a two-sided tape. Good news (softer inflation, decent spending) can fuel relief rallies; bad news (jobs cracking, sticky services inflation) can re-price risk quickly, especially in October’s higher-volatility regime. For traders, that argues for tighter risk management and respecting levels. For investors, it argues for leaning into quality on weakness rather than chasing strength.
Bottom line: We’re at the part of the cycle where the Fed wants to cushion the landing without reigniting inflation. If inflation trends lower and jobs cool gradually, markets can live with slower growth, especially if rate relief continues. If either side of that balance breaks, October is a month that won’t hesitate to show it.
This analysis is for informational purposes only and not investment advice.