Market Minute: August 22nd, 2025 — All Eyes on the Fed
Federal Reserve Chair Jerome Powel spoke today at the Fed’s meeting in Jackson Hole, Wyoming. President Trump and others have been putting significant pressure on the Fed to cut interest rates. It is important to remember that the Federal Reserve is focused on short-term rates in its rate-setting activity, so a cut to the Federal Funds Rate does not necessarily mean that you will see the same corresponding decline in longer-term rates. For example, mortgage rates are generally set based on the yield of the 10-year Treasury note, not the Federal Funds Rate.
As a refresher, in simple terms, the Federal Funds Rate is the interest banks charge each other for short-term loans to meet their reserve requirements. The Fed can impact longer-term rates through open-market operations, which is where the Fed either buys or sells Treasury notes or bonds to influence longer-term interest rates, such as mortgages. If the Fed wants to lower rates, it can purchase bonds, which tend to push rates down. Conversely, if the Fed sells securities, this can have the impact of driving up rates. The bonds they sell add to more supply in the market, and the added supply shifts interest rates higher to attract investors. The opposite holds true when the Fed is a buyer of bonds.
We have also been observing changes in consumer behavior. For example, Walmart and other discount retailers have seen an uptick in store traffic, suggesting consumers are becoming more value-conscious. Also, fast-casual dining chains are experiencing higher demand, likely driven by middle-class consumers trading down from “white tablecloth” restaurants. Both trends show how sensitive consumers are to rising prices and the broader economic uncertainty that is pervasive in the country at this time.
Today, Jerome Powell gave a low-conviction indication that there could be possible interest rate cuts, mainly due to the high level of uncertainty around the economy. During the annual address at Jackson Hole, Powell commented, “With policy in restrictive territory, the baseline outlook and the shifting balance of risk may warrant adjusting our policy stance.” Powell did not specifically address the pressure that has been on the Fed to cut rates, but did note the continued importance of Fed independence.
Powell also discussed the Fed’s twin mandate to maintain strong employment and keep inflation low. While he noted that the economy has shown “resilience,” he cautioned that tariffs could increase the risk of inflation rising again. It seems that the greatest risk the Fed is trying to keep in check is the risk of stagflation. Stagflation is a market condition where you have stagnant economic growth and rising inflation. Stocks rallied today on the notion that the Fed is leaning towards a rate cut. This Fed will remain data dependent, and all eyes will be on the September Fed meeting.
More to come! Please reach out to us at (475) 256-0174 if you would like to discuss your portfolio or explore a personalized financial plan.
