Markets Drop 2.7% on China Rare Earth Curbs as Fed Workforce Cuts Begin
Market and Economic Commentary
Markets sold off sharply today. The S&P 500 closed down 2.71%, and the Dow shed 878 points—the worst single-day decline since April. The trigger? U.S.-China tensions over rare earth minerals just went from simmer to boil.
President Trump threatened "massive" additional tariffs on China and floated the idea of canceling his planned meeting with President Xi at the upcoming APEC summit. On Wednesday, China announced sweeping new export restrictions on rare earth minerals. They added five critical elements to their control list and slapped licensing requirements on any product containing more than 0.1% Chinese-sourced rare earths. Given that China controls roughly 90% of global rare earth processing capacity, this immediately creates supply chain problems across semiconductors, electronics, automotive, and defense manufacturing.
The good news—if you can call it that—is these restrictions don't kick in until December 1. That gives us about ten weeks for a diplomatic solution. Whether this represents genuine escalation or just aggressive negotiating tactics and bluster remains unclear. What we know for certain: markets hate uncertainty, and the rhetoric has gotten considerably sharper compared to what we saw earlier this year.
Now for some actually positive news. Despite the government shutdown entering its tenth day, the Bureau of Labor Statistics announced it will recall employees to finish the September Consumer Price Index report. We'll get that data on October 24—nine days late, but critically, four days before the Federal Reserve's October 28-29 policy meeting. They're making this exception to meet the statutory deadline for calculating Social Security cost-of-living adjustments, which must be published before November 1.
The September jobs report remains delayed. Meanwhile, the Atlanta Fed's GDPNow model still points to 3.8% third-quarter growth—a signal the economy continues expanding at a robust pace despite recent disruptions. At the same time, the Cleveland Fed's Inflation Nowcast tracks inflation at 3%, sitting a full percentage point above the Fed's 2% target.
OMB Director Russell Vought posted on social media today claiming that federal workforce reductions have begun—which would be unprecedented during a shutdown. According to his posts, the administration projects roughly 300,000 federal employees will be affected by year-end through terminations, not furloughs. That would represent 12.5% of the civilian federal workforce. When you include contractors and grant-funded positions, the Atlanta Fed estimates the total impact could reach 1.2 million jobs.
We need to be clear about what we're working with here: these are social media announcements that haven't been confirmed through official OMB or Office of Personnel Management releases. We're watching for formal documentation, but until that arrives, treat these numbers as preliminary. That said, if accurate, this would be the largest single-year federal workforce reduction since World War II. These workers represent a small slice of the 160-million-person U.S. labor market, but they're concentrated in specific regions (think D.C. metro, San Diego, Colorado Springs) and tend to be higher-income earners. The 60-day notice period means actual terminations won't hit until December, so we won't see the full labor market impact in near-term data.
What this means going forward: Today's market reaction shows how quickly sentiment can flip on geopolitical news. When markets are this extended—the S&P was sitting near all-time highs before today's drop—rumors and unverified announcements tend to trigger sharper selloffs than they would in a more reasonably valued environment. There's simply less cushion and more profit-taking incentive when valuations are stretched. The Fed will have better clarity on inflation data heading into their October meeting, which removes one major question mark. They'll just have to make their decision without September employment figures—relying instead on the mosaic of private data and regional indicators we're all piecing together.
This Week's Economic News and Data
CME FedWatch Tool: Federal Reserve Rate Expectations
| Meeting Date | Most Likely Range | Probability | Implied Change |
|---|---|---|---|
| October 29, 2025 | 3.75-4.00% | 96.7% | -0.25% |
| December 10, 2025 | 3.50-3.75% | 90.2% | -0.25% |
| January 28, 2026 | 3.50-3.75% | 50.9% | Hold likely |
| March 18, 2026 | 3.25-3.50% | 47.2% | -0.25% |
| December 9, 2026 | 2.75-3.00% | 28.3% | Total: -1.25% |
The CME FedWatch Tool—which tracks trader expectations for Federal Reserve interest rate decisions based on federal funds futures contracts (financial instruments that bet on where rates will be)—shows markets pricing in aggressive rate cuts ahead. With rates currently at 4.00-4.25%, traders see a 96.7% chance of a quarter-point cut at the October 29 meeting, followed by another likely cut in December (90.2% probability of reaching 3.50-3.75%). Markets anticipate continued easing throughout 2026, with rates potentially falling to 2.75-3.00% by year-end. These probabilities shift constantly based on economic data and represent market sentiment, not Federal Reserve guidance.
CME Group (2025) CME FedWatch Tool: Federal Reserve Meeting Probabilities. Available at: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html (Accessed: October 10, 2025)
The Carlyle Group: Alternative Employment & Economic Indicators
| Price Component | Change |
|---|---|
| Energy Prices | -3.8% |
| Services (ex-shelter) | +3.3% |
| Residential Construction (YoY) | -2.5% |
With the federal government shutdown preventing official data releases, The Carlyle Group, one of the world's largest private equity firms managing a diverse portfolio of companies across multiple industries, published alternative economic indicators based on data from 277 portfolio companies and 730,000 employees worldwide. September job creation fell to just 17,000—the weakest since the 2020 recession and far below the 54,000 economists expected.
The Carlyle Group (2025) Carlyle Releases Proprietary U.S. Economic Indicators to Fill Gap Left by Government Shutdown. Available at: https://www.carlyle.com/media-room/news-release-archive/carlyle-releases-proprietary-us-economic-indicators-government-shutdown (Accessed: October 7, 2025)
New York Fed: Survey of Consumer Expectations (September 2025)
| Category | Expected 1-Year Change |
|---|---|
| Food Prices | +5.8% |
| Medical Care | +9.3% |
| Rent | +7.0% |
| Gas Prices | +4.2% |
| College Education | +7.0% |
Consumer confidence is flashing warning signals. The New York Fed's September survey of 1,200 households shows inflation expectations jumped to 3.4%—with the sharpest increases among households earning under $50,000—while expected wage growth fell to 2.4%, the lowest since April 2021. That's a direct hit to purchasing power.
The outlook darkened further: consumers see a 41.1% probability of rising unemployment ahead, while expecting medical costs to climb 9.3% and food prices to rise 5.8% over the next year.
Bottom line: people expect essential costs to keep rising while their paychecks fall further behind.
Federal Reserve Bank of New York (2025) Short-Term Inflation Expectations Continue to Tick Up; Labor Market Expectations Deteriorate. Available at: https://www.newyorkfed.org/newsevents/news/research/2025/20251007 (Accessed: October 7, 2025)
Federal Reserve FOMC Minutes (September 2025)
| FOMC Member Views | Split |
|---|---|
| Support further easing by year-end | Most |
| Emphasize upside inflation risks | Majority |
| Preferred holding rates unchanged | A few |
| Favor two more 0.25% cuts by Dec | 10-9 |
The Federal Reserve's September 16-17 meeting minutes reveal a divided committee wrestling with mixed economic signals. The FOMC voted 11-1 to cut rates by 25 basis points to 4.00-4.25%, with Governor Stephen Miran dissenting in favor of a larger half-point cut, citing labor market weakness and progress on inflation.
Here's the tension: While most officials support additional cuts this year, several participants argued there's merit in keeping rates unchanged given stalled inflation progress. The dot plot shows a razor-thin 10-9 split favoring two more cuts before year-end. This lack of consensus signals the Fed's struggle to balance supporting growth while ensuring inflation returns to their 2% target.
Federal Reserve Board (2025) Minutes of the Federal Open Market Committee, September 16-17, 2025. Available at: https://www.federalreserve.gov/monetarypolicy/fomcminutes20250917.htm (Accessed: October 9, 2025)
Dallas Fed: Break-Even Employment and Immigration Effects
| Period | Immigration Pattern | Monthly Job Growth Needed |
|---|---|---|
| Pre-Pandemic | Normal levels | ~90,000 |
| 2022-2023 | Immigration surge | ~250,000 |
| Mid-2024 to Mid-2025 | Sharp reversal | ~30,000 |
Dallas Fed research shows recent weak job growth signals rebalancing, not weakness. Break-even employment—monthly jobs needed to keep unemployment steady—has plummeted to 30,000 in mid-2025 from 250,000 in 2023, driven by immigration reversal with an estimated 300,000 net outflow (including self-deportation) following the 2022-2023 surge. With slower labor force expansion, stable unemployment requires far fewer monthly jobs, meaning modest gains indicate balance, not weakness.
Cheremukhin, A. (2025) Break-even employment declined after immigration changes. Federal Reserve Bank of Dallas Economics. Available at: https://www.dallasfed.org/research/economics/2025/1009 (Accessed: October 9, 2025)
Senate HELP Committee: AI and Automation Job Displacement Report
| Occupation | Jobs at Risk | % Replacement |
|---|---|---|
| Fast Food/Counter Workers | 3.3M | 89% |
| Customer Service Reps | 2.5M | 83% |
| Freight/Stock Movers | 2.4M | 81% |
| Retail Salespersons | 2.4M | 62% |
| Accountants/Auditors | 992K | 64% |
| Truck Drivers | 1.0M | 47% |
Senator Bernie Sanders' Senate committee released a report warning AI and automation could eliminate nearly 100 million American jobs over the next decade. Using ChatGPT to analyze 774 occupations from federal data, staff projects 97 million jobs at risk, with 15 of 20 major sectors seeing over half their positions automated. Most vulnerable: fast food workers (89%), customer service representatives (83%), and accountants (64%). Proposed responses include a 32-hour workweek, robot taxes on companies replacing workers, and mandatory worker board representation.
Sanders, B. (2025) The Big Tech Oligarchs' War Against Workers: AI and Automation Could Destroy Nearly 100 Million U.S Jobs in a Decade. Senate Health, Education, Labor and Pensions Committee Minority Staff Report. Available at: https://www.sanders.senate.gov/wp-content/uploads/10.6.2025-The-Big-Tech-Oligarchs-War-Against-Workers.pdf (Accessed: October 10, 2025)
University of Michigan: Consumer Sentiment (October 2025 Preliminary)
| Inflation Expectation | October 2025 | September 2025 | Change |
|---|---|---|---|
| 1-Year Ahead | 4.6% | 4.7% | -0.1% |
| 5-Year Ahead | 3.7% | 3.7% | Unchanged |
The preliminary University of Michigan Consumer Sentiment Index for October came in at 55.0—the third consecutive decline and near a five-month low. While barely changed from September's 55.1, it beat expectations of 54.2. The index masks divergence: Current Conditions improved to 61.0, while Expectations slipped to 51.2. Consumer inflation expectations for the year ahead edged down to 4.6% from 4.7%, though the five-year outlook held at 3.7%—both well above the Fed's 2% target. With the government shutdown preventing official data releases, this private survey is receiving heightened market attention.
University of Michigan (2025) Surveys of Consumers: Preliminary October 2025. Available at: https://www.sca.isr.umich.edu/ (Accessed: October 10, 2025)
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