To The Moon

$S&P 500(.SPX)$

As Wall Street braces for the release of the FOMC minutes later this week, traders face a rare convergence of monetary and fiscal uncertainty. The federal government shutdown has now stretched into its sixth day, halting several key economic data releases and complicating the Federal Reserve’s already delicate balancing act.

Last month, the Fed cut its benchmark rate by 25 basis points, marking its first easing move since 2020. But investors remain divided over whether that cut was the start of a new cycle — or merely a one-off insurance adjustment.

Complicating matters, Fed Chair Jerome Powell described the current landscape as a “challenging situation,” acknowledging that inflation risks remain tilted to the upside, while employment risks are leaning to the downside — a rare admission of dual vulnerability in both the labor and price fronts.

Now, with Powell scheduled to speak again on Thursday, and the minutes due for release Wednesday, markets are asking: Will the Fed cut again in October — or pause to assess the damage?

The Shutdown Effect: Economic Blind Spot or Policy Catalyst?

Government shutdowns have always carried economic costs, but this one hits differently. With agencies shuttered and nonessential staff furloughed, data flow has slowed to a trickle. Reports such as the CPI, PPI, and employment figures could face delays — meaning the Fed may have to make decisions in a partial information vacuum.

For policymakers, that’s a dangerous place to be. Without updated inflation and labor metrics, the FOMC could either:

1. Err on the side of caution, holding rates steady until reliable data returns, or

2. Preemptively cut again, fearing that prolonged government paralysis could sap consumer confidence and trigger a slowdown.

Historically, the Fed leans toward stability in moments of fiscal turbulence. However, this time inflation still runs above the 2% target, and wage growth remains sticky. That complicates the case for another near-term rate reduction.

Market Reactions: Stocks Surge as Fed Caution Fades

Despite the chaos in Washington, equity markets have rallied sharply in recent sessions. The S&P 500 and Nasdaq 100 posted their best week in two months, fueled by rate-cut optimism and AI-fueled tech momentum. Sectors most sensitive to rates — semiconductors, real estate, and consumer discretionary — have led the charge, with some individual names up 20–30% in just a few days.

The irony isn’t lost on economists: while the Fed debates the cost of money, investors are behaving as if the era of cheap credit is already back. The VIX volatility index fell below 14, signaling near-euphoric calm, while retail options trading hit a new post-2021 high.

But as many veterans recall, similar patterns preceded the late-2021 “irrational exuberance” phase, when liquidity-driven optimism detached from fundamentals.

Could we be seeing that again?

The Fed’s Dilemma: Inflation Control vs. Recession Risk

Powell’s statement from September captures the Fed’s conundrum perfectly:

“Inflation risks are still to the upside, but employment is showing signs of cooling. We are facing a challenging situation.”

This asymmetric setup complicates policy timing. While headline inflation has cooled to around 2.8%, core metrics remain stubborn, and service-sector prices continue to rise. Meanwhile, job openings have fallen to a two-year low, and wage growth momentum is stalling.

Cutting rates too quickly could reignite inflation expectations, especially with energy prices and housing costs firming again. But staying too tight for too long risks pushing the economy into contraction — particularly if fiscal dysfunction persists.

Market-based expectations currently price in a 45% probability of another 25 bps cut in October, rising to nearly 70% by December, according to CME FedWatch data. Traders appear convinced the Fed will err on the side of accommodation — but history warns that such certainty rarely ages well.

Powell’s Thursday Speech: The Market’s Real Test

Beyond the minutes, all eyes will be on Jerome Powell’s Thursday remarks at the International Monetary Policy Forum. Investors will parse every word for hints about the direction and magnitude of the next policy move.

• If Powell hints at another imminent cut, risk assets could surge further — pushing the S&P 500 toward new highs and likely driving Treasury yields lower across the curve.

• But if he emphasizes patience and inflation vigilance, markets could quickly reverse, with tech and growth names taking the brunt of the hit.

The tone of the FOMC minutes themselves will also matter. If the text shows broad consensus for continued easing, traders will likely front-run the next rate cut. Conversely, if the discussion reveals deep divisions or hawkish dissent, that could temper expectations and bring volatility back into play.

Are Markets Becoming Irrational Again?

The rally in recent weeks has revived concerns that the market may be entering a new phase of speculative overreach. Valuations in key sectors — especially AI and cloud infrastructure — have stretched to levels reminiscent of mid-2021.

For instance:

• Nvidia (NVDA) trades at over 35x forward earnings, despite slowing quarter-over-quarter growth.

• Tesla (TSLA) trades at nearly 60x forward EPS, even as auto margins compress.

• Semiconductor ETFs are up nearly 20% since mid-September, far outpacing fundamentals.

Meanwhile, defensive sectors like utilities, healthcare, and staples have lagged, suggesting that market breadth remains narrow — another hallmark of speculative phases.

If the Fed’s October message turns more cautious, this risk-on sentiment could unwind quickly. The last time markets priced in early cuts prematurely, the subsequent correction was swift and painful.

Macro Picture: Liquidity Rules the Day

Beyond rate speculation, liquidity remains the true driver. The Fed’s recent balance sheet data shows a temporary uptick in reserve levels, as Treasury issuance slowed during the shutdown. That short-term liquidity boost has been a quiet tailwind for risk assets.

But this is temporary. Once the government reopens and the Treasury resumes heavy issuance to replenish the TGA (Treasury General Account), liquidity could drain again — putting pressure on both equities and crypto.

That’s why the coming week could mark an inflection point: liquidity expansion, rate expectations, and macro uncertainty are colliding at once.

Outlook: What to Expect This Week

• Monday–Wednesday: Continued speculation leading up to FOMC minutes; moderate volatility expected.

• Wednesday: FOMC minutes release; markets will key in on tone — “balanced” vs. “decisive.”

• Thursday: Powell speaks; potential for strong market move (±2% intraday) depending on dovish/hawkish lean.

• Friday: Likely profit-taking if Powell’s tone disappoints bulls.

In short: volatility is returning, even if the surface still looks calm.

Final Verdict: Hope, Fear, and Overconfidence

With a government shutdown clouding visibility, investors are navigating a data desert. The Fed, meanwhile, is trying to interpret an economy split between resilient consumer demand and fragile corporate earnings.

Whether the Fed delivers another 25 bps cut in October depends largely on Powell’s Thursday tone — but the bigger story is behavioral. Markets are acting like rate cuts are guaranteed. But the Fed’s job isn’t to comfort traders; it’s to stabilize the economy.

If this rally extends further without earnings support, we may soon cross from optimism into irrational exuberance 2.0 — a phase that history has never rewarded for long.

Key Takeaways

1. The Fed faces a blind spot as the shutdown delays key data.

2. Another 25 bps cut in October is possible, but far from certain.

3. Powell’s Thursday remarks could set the tone for Q4 market direction.

4. Equity valuations are expanding faster than fundamentals.

5. A short-term correction is likely if the Fed signals patience instead of panic.

Bottom Line: The Fed may be nearing the end of its tightening cycle — but that doesn’t mean the market is risk-free. Amid shutdown chaos and euphoric rallies, it’s worth recalling: monetary pivots don’t always bring immediate relief… sometimes, they signal that the storm is only beginning to form.