Published August 22, 2025
To listen to the market media you would think the weight of the world hangs in the balance every time the Federal Reserve meets. Today’s speech at the annual Fed meeting in Wyoming is presumed to give investors a peak into whether the Central Bank will cut interest rates in September as well as their outlook for cuts through year-end.
Unlike central banks in other countries, which are focused entirely on inflation, the U.S. Central Bank is tasked with seeking “full employment” in addition to managing inflation. Thus, the Fed responds to clues about the broader economy and not just price inputs. Unemployment has remained low throughout the past three years, ticking up from 3.5% to 4.0%. The most recent monthly jobs reports have displayed a lack of job growth. But nothing overly alarming. Wage growth, a significant driver of inflation, remains above +4% as it has been all year. Consumer price inputs show inflation around +2.5%, above the Fed’s stated target of +2% price growth. Consumer prices have been rising around +2.5% for the past two years. In short, both of the Fed’s mandates appear reasonably stable and under control. Hence the calls to bring interest rates back down.
The Fed has been very consistent in their message over the past several months. They acknowledge that employment trends have been positive and that inflation has come down. They have been reluctant to unwind some of the interest rate hikes implemented to slow inflation, however. And that’s the rub. The Fed expresses concern about the coming impact of tariffs on prices fearing that inflation will begin rising again. There is recent data to support that concern, and company commentary suggesting that prices will be rising. But the inputs are inconsistent.
The market doesn’t have to wait for the Fed, of course. It has already priced in lower interest rates, which gives fodder to those who want the Fed to be more aggressive in reducing rates. The chart below shows the 2-year yield (pink line) about -0.75% below the Fed’s Target Rate (blue line). Thus, the market is already well below the Fed.
The yield curve stood inverted a year ago with short-term rates higher than long-term rates, often a harbinger of pending recession. The Fed has pushed down short-term rates a full -1% over the past year while expectations for long-term rates (and inflation) have risen. This “normalization” of the yield curve improves the prospects for banks as their short-term borrowing costs go down while their opportunity to lend at higher rates goes up. In theory, this incentivizes banks to be more willing to lend, thus pushing money into the economy to fuel growth.
Investors have priced in an 80% chance that the Fed will further cut rates in September. Fed Chair Powell’s speech Friday essentially confirmed that expectation noting that the weaker employment data somewhat offsets the concerns that prices will rise upcoming. This is because wage growth is the largest single driver of inflation. As employment conditions become less tight, the pressure on employers to pay more decreases. Powell sees this happening and the overall picture more balanced. Stocks loved his message.
Market Update
This week was all about interest rates as investors focus on whether the Federal Reserve will cut rates at their September meeting. Monday brought a -0.3% dip in stock indexes following a big gain the prior week. Semiconductor news was particularly active with Nvidia and AMD agreeing to share revenue with the federal government in an effort to buy favorable tariff treatment for their Chinese chip sales. Additionally, memory chip maker Micron raised its earnings outlook. Tuesday’s consumer price index report showed inflation largely unchanged fueling expectations for a Fed rate cut in September. Interest rates dipped on the report while growth stocks jumped +1.4% and interest rate-sensitive sectors, like housing, took flight. Stocks added +0.3% Wednesday as Treasury Secretary Bessent used the consumer price report to suggest the Fed make a 0.5% cut in September. The Trump Administration has made no secret of their desire for lower rates. The Fed has been cautious using the uncertainty around tariff impacts as their rationale for that concern. The Fed got support for that caution Thursday when the producer price report showed a strong inflationary rise. Taken together, the consumer and produce price reports showed prices rising but not hitting consumers. Either the consumer impact is yet to come. Or businesses are eating the rising input prices and suffering a bit of profit margin decline. The good news was that stocks digested the report with little change. Stocks ran in place Friday with economic news overshadowed by a summit meeting between Trump and Putin. Weakness in shares of semiconductor equipment maker Applied Materials on a weak report were offset at the index level by a surge in shares of health insurer United Healthcare. The health insurer has fallen -50% in a few months as the company’s Medicare Advantage program has hit profits and raised the ire of several members of Congress. Friday brought news that Warren Buffett’s Berkshire Hathaway has taken a stake in the beleaguered company. The stock is a large component of the Dow Industrials, which outperformed as a result of Friday’s pop upward.
Stocks added to their strong gains from the prior week. The S&P 500 (SPY) rose +0.97% while the Nasdaq 100 (QQQ) pushed higher by +0.45%. Gains in homebuilders and finance companies sent lagging small cap indexes (IWM) flying up +3.05%.
Warm wishes and until next week.