November 2025: Financial Stability & the Calm Before the Cut

The Calm Surface

With no FOMC meeting scheduled in November, the month offered a rare pause in the rate-cycle narrative. But beneath the surface, the Fed's November 7 Financial Stability Report painted a picture of accumulating fragility.

Financial conditions had eased substantially since September's first cut. Valuations returned to what the report termed "stretched levels." The S&P 500 forward P/E hovered around 23x — far above its 20-year average of roughly 16x. And the concentration was historic: the five largest companies held 30% of the S&P 500 and 20% of MSCI World, the greatest concentration in half a century.

Valuation & Concentration Dashboard

Financial Stability Risk Survey (Fed Nov 2025)

Respondents citing each risk as a top near-term concern:

Leverage in the Shadows

The report flagged steadily increasing hedge fund leverage across Treasury, derivatives, and equity strategies. Life insurer leverage sat in the top quartile of its historical distribution. The non-bank financial intermediary (NBFI) sector — once a peripheral concern — had become a central node of systemic risk.

When 30% of survey respondents cited a sharp AI-driven asset price decline as a top near-term financial stability risk, it was clear that the reflexive loop we discussed in May had only intensified. Rising AI stock prices continued to attract capital, reinforcing the narrative, inflating valuations further. The question was no longer whether the loop existed, but what would break it.

The Shutdown's Shadow

The 43-day government shutdown — the longest in U.S. history — finally ended on November 12, after furloughing 1.4 million federal workers. The CBO estimated a permanent GDP loss of roughly $11 billion. But the more insidious damage was informational: BLS operations had been suspended, delaying jobs reports and CPI releases. October CPI data was never collected at all. The Fed was effectively flying partially blind.

When the September jobs report finally arrived on November 20, it showed +119,000 nonfarm payrolls with unemployment at 4.4% — the highest since October 2021. The data confirmed what markets had already priced: the labor market was softening, and the Fed's September cut had been well-timed.

Data Release Timeline (Shutdown Impact)

FOMC Minutes Reveal Deep Divisions

The October FOMC minutes, released November 19, revealed a committee "at odds" over the fundamental question: was a stalling labor market or stubborn inflation the bigger threat? The minutes cast doubt on a December cut, with market pricing falling to roughly 50% probability — down from near-certainty.

Global Context

The global picture was cautiously optimistic. S&P Global revised growth forecasts upward, with a more positive assessment of China's outlook. Europe's data was "mostly surprising on the upside" as tariff impacts proved "more benign than originally anticipated." The ECB held rates steady, with eurozone unemployment at a historic low of 6.4%.

Japan's BOJ held at 0.5%, preparing for a December rate hike that would take rates to their highest since 1995.

Looking Ahead

The stage was set for a consequential December meeting. With QT scheduled to formally end December 1, the Fed was about to close one chapter of post-pandemic normalization. The question was whether the next chapter would be written by a unified committee or one increasingly fractured by divergent views on inflation, employment, and the appropriate pace of easing.