Market Minute: August 28th, 2025 — Fed Rate Cut Debate and Economic Signals
The great debate in the market right now is whether the Fed cuts the Federal Funds rate at its next meeting. Many pundits believe that a 25-basis-point cut is already baked in and are assuming it will happen. At Innovative Asset Advisors Group, we are taking more of a data-dependent view, mainly because this Fed has consistently emphasized data in its decision-making.
U.S. GDP Growth Surpasses Forecasts in Q2 2025
The most recent release of Gross Domestic Product (GDP) reported that the U.S. economy grew at an annual rate of 3.3% in the second quarter, compared with the initial estimate of 3.0% and a consensus forecast of 3.1%. Despite tariffs and concerns for consumer spending, the economy continues to grow. Consumer spending — which represents about 70% of economic activity in the U.S. — rose by 1.6% outpacing the anticipated 1.4% growth rate. Exports also grew in the second quarter.
Economic Strength vs. Weakness: Key Factors for the Fed
The Fed’s real challenge is determining whether the economy shows more strength or weakness ahead. On the one hand, consumer spending appears strong enough to continue driving growth. On the other hand, there are rising concerns that the labor market is beginning to stall, artificial intelligence is reshaping economic dynamics, and the full effects of tariffs have yet to be felt.
Consumer Spending, Inflation, and the Fed’s Policy Options
If the Fed focuses on consumer strength, it may choose to maintain the current Fed Funds rate, because cutting rates will add fuel to the economy. However, if the Fed believed that second-quarter consumer spending is unsustainable and that the economy is more likely to weaken in the second half of the year due to these factors, a rate cut becomes more likely.
Looking Ahead: Will the Fed Cut or Hold Rates in 2025?
The point of all of this is that we are not fully in the camp that the Fed will cut rates, particularly if the economy is showing strength and inflation remains uncomfortably high. Under this scenario, the Fed could decide to maintain its current posture. The expectation of rate reductions now hinges on the Fed looking forward and projecting changes in the economy, versus their historic stance of being focused on past data.
We will continue to monitor economic data releases closely and share any updates on our perspective. As always, we are here to discuss your portfolio and explore ways we can help you achieve your financial goals. Contact us at (475) 256-0174 if you’d like to discuss.
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