Consumer Confidence Slides as Fed Signals Pause on Rate Cuts and Ends QT

Weekly Economic Review: Oct. 31, 2025

This week’s economic data includes: (1) The Conference Board’s Consumer Confidence Index and (2) October Federal Open Market Committee (FOMC) meeting.

Key Summary:

Consumer confidence fell for the third straight month in October amid economic and labor market concerns, while inflation expectations rose and holiday spending plans shifted toward lower-cost, value-driven purchases.

Consumer confidence slipped in October, with the Consumer Confidence Index falling to 94.6, its lowest level since April, and marking a third consecutive monthly decline. The drop reflects growing concerns about the economy and labor market, even as the Present Situation Index improved slightly to 129.3, signaling modest gains in business and job assessments. However, the Expectations Index fell to 71.5, remaining below the recession threshold for the ninth straight month, as consumers anticipate fewer job opportunities and weaker income prospects.

Inflation and economic uncertainty continue to weigh on sentiment, with price expectations rising to 5.9% and the government shutdown adding pressure. Purchasing plans were mixed: demand for used cars and travel increased, while home-buying intentions softened. Holiday spending is expected to decline—3.9% less on gifts and 12% less on non-gifts—with consumers prioritizing promotions and value. Most holiday purchases are projected between October and year-end, with November seeing the largest share.

The Fed cut rates by 25 bps to a 3.75%–4.00% range as an insurance measure against labor market weakness, signaled a cautious and hawkish stance on any December cut, and announced the end of quantitative tightening to stabilize liquidity and ease market stress.

The FOMC voted 10–2 to cut its benchmark interest rate by 25 basis points, setting a new target range of 3.75%–4.00%. This marks the second rate cut of the year, totaling 50 basis points. The move was intended to guard against further labor market weakness. Two members dissented: one favored a larger cut, while another opposed any reduction.

Chair Powell noted that the economic outlook remains largely unchanged since September. The labor market continues to cool, inflation is still elevated, growth is expanding moderately—stronger than expected—driven by consumer spending and business investment, while housing remains weak. Powell emphasized that downside employment risks have increased, framing the cut as an insurance measure.

Looking ahead, Powell signaled caution on another rate cut in December, reducing market expectations from nearly 100% to about 60%, citing limited data due to the government shutdown. Additionally, the Fed announced it will end quantitative tightening on December 1, after reducing its balance sheet by $2.2 trillion over 3.5 years. This decision aims to stabilize reserves and ease stress in money markets, preventing volatility and upward pressure on long-term rates.

U.S. equities extended their rally on strong tech earnings and trade optimism, while rising Treasury yields and a hawkish Fed stance tempered rate-cut expectations and shifted focus to gradual easing ahead.
U.S. equity markets extended their winning streak in October, with major indexes posting solid gains while small-cap stocks lagged amid rising Treasury yields and hawkish Fed signals. The rally was driven by optimism around the U.S.–China trade truce and strong tech earnings, with technology and communication services leading advances while energy and utilities underperformed.

Treasury yields moved higher across the curve as markets adjusted to a more cautious monetary policy outlook and reduced expectations for a near-term rate cut. While a December cut remains possible, the Fed’s hawkish tone has introduced uncertainty, and markets are now looking ahead to gradual easing over a longer term.

Further details on consumer confidence, the October FOMC meeting, market trends and the upcoming economic calendar are provided below.

Consumer Confidence – October Update:
The Conference Board reported that its Consumer Confidence Index fell slightly by 1.0 point to 94.6 in October, marking the lowest level since April, though still coming in above expectations. This decline represents the third consecutive monthly drop, driven primarily by growing concerns about the economy and labor market. In contrast, the Present Situation Index rose by 1.8 points to 129.3, reflecting modest improvements in assessments of business conditions and the labor market. The labor market differential edged up to 9.4, with the share of consumers reporting jobs as plentiful increasing to 27.8%, while those viewing jobs as hard-to-get also ticked up to 18.4%.

The Expectations Index, which measures consumers’ short-term outlook for income, business, and labor market conditions, fell by 2.9 points to 71.5 – the lowest level since June—and remained below the recession signal threshold of 80 for the ninth consecutive month. Consumers’ outlook on the labor market weakened, with more expecting fewer job opportunities in the next six months and expressing less optimism about income prospects.

Inflation remains a top concern, with price expectations inching up to 5.9% in October from 5.8% in September, and elevated compared to the 5.0% level at the end of 2024. The ongoing government shutdown also weighed on sentiment. While recession fears have eased slightly, more consumers believe a recession has already begun.

Purchasing intentions were mixed: plans to buy cars increased, driven by demand for used vehicles, while home-buying intentions declined despite an upward six-month trend. Travel plans rose. For the holiday season, consumers expect to spend 3.9% less on gifts and 12% less on non-gift items compared to last year, with spending decisions heavily influenced by promotions and value-seeking behavior. Most purchases are expected between October and year-end, with November accounting for the largest share.

October 28-29 FOMC Meeting:
The FOMC voted 10–2 to lower its benchmark interest rate by 25 basis points, setting a new target range of 3.75%–4.00% to mitigate further labor market weakness. This marks the second rate cut of the year, totaling 50 basis points.
• Dissents: Fed Governor Stephen Miran favored a 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid supported no cut.

Economic Assessment

In his post-meeting remarks, Chair Powell noted that the outlook for employment and inflation has remained largely unchanged since September:

• Labor market: Gradually cooling, with job gains slowing and both supply and demand declining.
• Inflation: Still somewhat elevated compared to the Fed’s 2% target.

Growth: Economic activity expanding at a moderate pace, stronger than expected, driven by consumer spending and business investment; housing remains weak.

Powell emphasized that downside risks to employment have increased, framing the rate cut as an insurance measure against further deterioration.

December Rate Cut Expectation

Powell cautioned that another rate reduction in December is “far from a foregone conclusion.” His comments reduced market expectations for a December cut from nearly 100% to about 60%. The Fed intends to proceed cautiously, given limited data availability due to the ongoing government shutdown. Powell’s analogy:

“If you’re driving in the fog, you slow down.”

End of Quantitative Tightening (QT)

The Fed announced it will end balance sheet runoff on December 1, after slowing the pace earlier this year.

• Over 3.5 years, securities holdings declined by $2.2 trillion, bringing the balance sheet to $6.6 trillion, its smallest since 2020.
• Reinvestment strategy:
  • Treasury principal payments will be rolled over at auction.
  • Agency debt and MBS principal payments will be reinvested into Treasury bills.

This decision reflects signs of stress in money markets since mid-October—high demand for the Standing Repo Facility (SRF) and elevated short-term rates—indicating reserves had fallen to levels risking volatility and policy rate control. Ending QT aims to stabilize reserves and reduce upward pressure on long-term rates, avoiding disruptions like those of 2018.

Market Analysis:

Equity Market Weekly Recap

Major equity markets posted strong gains this week. October marked the sixth consecutive monthly gain for the S&P 500 and the seventh straight monthly gain for the Nasdaq—its longest winning streak since 2018. In contrast, Russell 2000 (small-cap stocks) declined, partly due to rising Treasury yields following hawkish Fed comments.

The rally was fueled by the U.S.–China trade truce and strong earnings from leading tech companies, notably Amazon, whose shares surged 9.6% after reporting robust Q3 results. Amazon’s cloud division, AWS, delivered its fastest revenue growth since 2022. In terms of market capitalization milestones:

• Nvidia became the world’s first $5 trillion company
• Apple and Microsoft both surpassed $4 trillion

Technology and communication services led the advance, while energy and utilities underperformed.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: +2.24% (weekly) & +22.86% (YTD), closing at 23,725
• S&P 500: +0.71% (weekly) & +16.30% (YTD), ending at 6,840
• Dow Jones Industrial Average: +0.75% (weekly) & +11.80% (YTD), closing at 47,563
• Russell 2000: -1.36% (weekly) & +11.18% (YTD), ending at 2,479

Treasury Market Update

Treasury yields moved mostly higher across the curve over the past week, with the most notable increases in maturities of one year and longer. This resulted in a slight steepening of the curve:

• 2-year yield: 3.60% (+12 bps)
• 5-year yield: 3.71% (+10 bps)
• 10-year yield: 4.11% (+9 bps)

These changes reflect a broad market adjustment to the revised monetary policy outlook, driven largely by the Fed’s hawkish stance on the December rate cut. The probability of a December cut fell sharply—from nearly 100% last week to the low 60% range now.

Rate Cut Expectations

Markets anticipate virtually no rate cut at the December 9–10 FOMC meeting. Current estimates place the probability of a December cut at 68%, which is close to a coin toss. Looking ahead to 2026, markets are fully pricing in three 25-basis-point cuts—expected in January, June, and September. This would bring the federal funds rate (upper bound) down to 3.25% in 2026 from the current 4.00%.

Next Week’s Economic Calendar:

The economic calendar for next week is packed with key economic releases including job openings, non-farm payrolls and unemployment rate. Scheduled reports include:

• Monday:
  • ISM Manufacturing Index
  • Construction Spending*
• Tuesday:
  • JOLTS Job Openings*
  • Durable Goods Orders*
• Wednesday:
  • ADP Employment Change
  • ISM Services Index
• Thursday:
  • Weekly Jobless Claims*
  • Unit Labor Costs*
• Friday:
  • Change in Nonfarm Payrolls*
  • Unemployment Rate*
  • Labor Force Participation Rate*
  • Average Hourly Earnings*
  • Consumer Credit*

* Reports may be delayed due to the government shutdown.

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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