From Rate Cuts to Consumer Stress: Navigating a Split Economy - 9/22/25

In this episode of Paramount Wealth Perspectives, Chris Coyle and CIO Scott Tremlett unpack the Fed’s latest rate cut and what it means for markets, inflation, and the labor outlook. They explore the split inside the Fed, the uneven reality of U.S. consumer spending, and how global dynamics—from Europe’s political risks to Asia’s shifting trends—are shaping investment opportunities. Tune in for practical insights on balancing portfolios amid cautious optimism and persistent uncertainty. 

Transcript

Chris Coyle: 0:00

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Hello everyone. Welcome to Paramount Wealth Perspectives, your go-to podcast for the latest updates on global markets and current economic events. This is your host, Chris Coyle. I'm the marketing director and an advisor here at Paramount Associates Wealth Management. And today I'm joined by Paramount's, chief Investment Officer, Scott Tremlett. Scott, thanks for sitting down again with me today. Let's dive right in. The Fed just made another 25 basis point cut, but markets didn't cheer as much as you might expect. What's your read Right Chris, the Fed lowered its benchmark rate to four and to four point a quarter percent. Powell called it a risk management move stressing. It wasn't the start of an aggressive easing cycle. Yields actually ticked up a bit because investors saw it as more cautionary. At the same time, we had job as claims fall sharply to 231,000. The biggest drop in nearly four years. That shows the labor market's still holding up. And they released their updated projections too. Correct? Exactly. The DOT plot, as they call it now, points to potentially two more rate cuts this year, but the Fed is split. Some members want to move faster. Others think inflation is still too sticky. Powell may clear the Fed faces a challenging situation. Inflation above target labor market showing cracks and tariffs, adding price pressures. It's a balancing act right now between supporting jobs. And not reigniting inflation. I also saw dissent in the meeting. Yes, governor Myron dissented, he actually wanted a half point cut. He argues rates are already too restrictive, giving structural shifts like lower immigration, tariff revenues, and demographics, and he really believes in a lower neutral rate in his view keeping policy. This tight risks, unnecessary job losses. And what are Fed members saying right now in real time? Well, just today, Bostic from Atlanta said there's little reason, quote unquote, to cut further. Right now he thinks inflation could linger above 2% until around 2028. Meanwhile, mus of St. Louis echoed that concern. Warning, there's limited room for more cuts this year without risking too much accommodation on the other side. Myron repeated his case for faster easing, saying high rates are already weighing heavily on lower income workers. So we've got a real divide inside the Fed. Let's pivot to inflation for a moment. Powell admitted it's still above target. Where do you see inflation trending into next year? Well, headline inflation should continue drifting lower, largely because energy prices are soft oils around$62 a barrel compared with over$70 at the start of the. The core services, particularly housing and healthcare, remain sticky. My expectation is core PCE settles in the uh, two and a half to 3% range next year, which is better, but still above the Fed's goal. That's why some members are really nervous about cutting too fast. You mentioned the labor market with job gain slowing, is there a risk of a sharper deterioration? That's the key risk to me. Payroll growth has already slowed from about 166,000 per month in 2024 to 130,000 recently. If that weakens further. Unemployment could climb quickly. Right now, unemployment is at about 4.2% up from 3.7% a year ago, and the Fed wants to avoid a spike, but they're constrained by inflation. So you can see the stop and go easing cycle, cutting enough to stabilize jobs, but not so much that inflation expectations do drift higher. How are financial conditions feeding back into the economy? Are markets. Easing too much relative to what the Fed wants. Well, equity markets, Chris, are at all time record highs. The s and p 500 is up more than 14% this year, and the NASDAQ is up nearly 18%. Credit spreads are tight and housing demand is stabilized. Despite the 30 year mortgage rates, around 6.5%. From the Fed's perspective, that resilience gives them room to be cautious. If markets were cratering, they cut more aggressively. Instead, they're balancing a still loose financial backdrop against weaker labor data. And what's happening on the consumer side, because spending is really the backbone of growth here. On the surface, consumption still looks strong. Chris core retail sales rose 0.7% in August. Well above expectations and real spending is positive, but the distribution tells a different story. Low income households are showing clear stress. The personal savings rate for the bottom quartile is falling close to 2% versus eight to 9% for middle and high income groups. Credit card delinquency rates are at their highest since 2011 with serious delinquencies, over 10% for subprime borrowers. Auto loan delinquencies are rising sharply as well but by contrast, wealthier households are still in good shape. Stock portfolios are up double digits. Year to date. Home equity values are near record highs and their savings rates remain positive. That's why you still see record spending on travel restaurants and discretionary goods at the top end, so the averages mass, the reality. Some households are thriving. While others are hurting. Exactly. It's a K shaped, spending path at the bottom. Families are trading down to store brands, cutting back on essentials or delaying medical care at the top. Households are buying luxury goods and flying internationally. And I mean, that explains why some are outperforming while others warn of weakness. Looking ahead, how sustainable is this? It really comes down to three things. First, the fat. How much further they cut and how fast. Second, the labor market, whether job growth slows meaningfully and third inflation, whether sticky services and shelter costs. Finally, cool. My base case, spending moderates into 2026. Aggregate consumption slows, but doesn't collapse unless jobs roll over middle and higher income. Households will keep spending and bottom quartile is tapped out. Now let's broaden the lens a bit. How does US consumer trends compare with what we're seeing overseas? The contrasts are really striking in. In Europe. Consumer spending has been far weaker, high energy cost and persistent inflation have left real disposable income. Flat household confidence. Surveys remain depressed, and retail sales volumes in places like Germany and the UK are stagnant. Unlike the US where top income households are fueling discretionary demand, European consumers are far more cautious across the board. In Asia, it's it's more complex. In Japan, spending has been steady, but constrained by slow wage growth, even though inflation has been above target for over three years. In China, households are actually turning to equities as savings alternatives. Since property markets remain soft and deposit rates are low, that shift has boosted Chinese stock markets this year compared with the US global consumers look. Less resilient. Overall, the US stands out because wealthier households are still driving aggregate spending. While lower income Americans are still under real strain. In Europe, the pain is more evenly distributed. While in Asia, behavior is shifting toward investment rather than consumption. So the United States looks relatively stronger, but beneath the surface. The distributional issues are sharper. That's it. Exactly. The US consumer is still the engine of global demand, but it's increasingly powered by the top half of the income spectrum that makes the economy look resilient on the surface, but vulnerable if those households pull back internationally, the story is more about broad caution. Which is why global growth is so dependent on whether the US consumers keep spending one last angle, the dollar it's been weaker this year. How does that tie in? The dollar is down nearly 10% year to date, thanks to nearing interest rate differentials. That helps us multinationals with overseas earnings, but a weaker dollar can raise import prices, which hits low income households hardest. So again, even currency moves show up differently across income groups. Given that backdrop, how should investors think about opportunities internationally? Chris, I'd, I'd really frame it this way. In Europe, weakness and broad consumption means investors should focus on exporters and globally diversified companies that can tap demand outside the region. Luxury goods and industrials that sell to the US and Asia remain more resilient right now in Asia. China's shift towards equity investing is creating liquidity in local markets and select consumer tech and financial firms are definitely positioned to benefit and with the dollar down nearly 10% this year. non-US assets become more compelling. Currency tailwinds alone can enhance returns when allocating abroad. So the takeaway is that while the US consumer strength is still the centerpiece, opportunities abroad shouldn't be overlooked. You wanna target regions and sectors that either benefit from us demand or experiencing structural shifts that support asset prices, even if local consumption may be weak. That's a great way to put it. Resilience in the United States, but selective opportunities globally, especially where currency and policy align. Yes, you got it. It's less about blanket exposure and more about finding those pockets where the macro story translate into durable earnings and cash flow. And how do you feel about United States stocks currently? Scott? Again, Chris, A targeted approach really does matter. Equities are still up over 14% year to date, but leadership is really narrow. Companies serving wealthier consumers have pricing power. Mass market retailers tied to lower income demand, face headwinds in credit. Public high yield could come under pressure if delinquencies rise, particularly in the consumer focus sectors. What's your message for investors trying to position portfolios in this environment? I know it sounds like a broken record, but diversification is critical with the dollar weaker and international equities gaining momentum. Global diversification definitely makes sense in fixed income. Yields are attractive both publicly and privately. However, the correlation between bonds and stocks has continued its ride up over the last few years. Causing diversification of fixed income to be less meaningful in stocks. Focus on quality companies with strong balance sheets and pricing power, and importantly, recognize the bifurcated consumer companies exposed to the high end of the market look much stronger than those tied to households under financial stress and don't rely on US stocks. Or international stocks to be your only performance drivers. There are many asset classes that are providing compelling risk reward characteristics right now. Well, thank you, Scott, for taking the time to share your thoughts. Thank you to our audience for tuning in, and remember to please submit your questions via email to general@paramountassoc.com. For now, stay informed. Stay ahead. And join us next time for more key updates shaping the global economy.