The tides are changing. Last week marked the 2025 Jackson Hole Economic Policy Symposium. Since 1978, this annual invitation-only event has been attended by economists, policymakers, academics, and investment professionals from around the world to debate economic policy. The breadth and depth of attendees and topics make it a natural draw for investors attempting to gain the latest insight into central bankers’ minds.
For context, here is a quick review of the past 12 months. The Federal Reserve (Fed) cut rates aggressively between September and December 2024, then paused, taking a wait-and-see approach. Financial markets responded with a strong upturn in the fourth quarter of 2024. At the beginning of 2025, the
Fed suggested rate cuts ahead without a definitive timeline. The markets factored in four rate cuts totaling 1% loaded in the first half of 2025. Since January 1st, Powell has offered different reasons NOT to cut rates, opting to hold rates steady. More recently, Powell had been pressured by non-Fed sources as well as some Fed voting members to cut rates.
Fed Chairman Powell used his Jackson Hole time slot to communicate his latest interest rate policy opinion. Whether Powell succumbed to pressure or arrived at the decision himself, Powell indicated his propensity to lower rates by 0.25% at the next Fed meeting on September 17th. Powell cited weakening labor market data as justification. 0.25% does not sound like much, but rate cuts (or raises) do not occur in singular moves. A 0.25% cut really means further rate cuts ahead (for compliance purposes… “highly likely” rate cuts ahead).
The financial markets are currently pricing in a very high probability of a rate cut at the September 17th Federal Reserve meeting. Throughout 2025, the financial markets have oscillated on the scale and timing of any rate cuts. We’ve been consistently indicating two (maybe, three) rate cuts to happen in the second half of the year.
Lower interest rates are akin to pressing the economy’s accelerator. Lower rates mean individuals will have lower borrowing costs for credit cards, mortgages, and lines of credits. Companies can borrow at lower rates to explore expansionary projects, free up cash, and add jobs. Lower rates are also accretive to stocks (via higher earnings and lower future cash flow discount rates) and bonds (due to yields being inversely related to bond prices).
The Fed is caught between a rock and a hard place. I know, you’re wondering, “If lower rates are good for the economy and financial markets, what’s the catch?” Accelerating the economy risks higher prices, i.e., inflation. The Fed has a dual mandate: controlled prices and full employment. With inflation showing stability (though higher than where the Fed wants), the Fed’s attention is shifting to firming up softening employment. With inflation still above the 2% inflation target, yet labor markets are softening, the Fed’s future rate decisions will be challenging. Something we will be paying close attention to.
There isn’t an easy answer. Older generations have paid into the trust fund and feel they deserve some return of (not necessarily a return on) their capital outlay. At the same time, younger generations are disenchanted, thinking they are supporting someone else with nothing left for themselves. The longer Washington politicians kick the can, the more challenging the solution is. This is not a matter for next month or next year, but rather something we need to pay attention to.
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