Although the US economy has been resilient, the effect of higher rates and trade wars has not been evenly distributed. The concentrations of both capital investment and subsequent earnings continue to build in the tech sector despite a stricter borrowing environment and more difficult global trade.

We see the S&P, NASDAQ and DOW all hitting record highs, home prices hitting all-time highs, bitcoin and gold, all at all-time highs and CPI sitting at 2.9% over the last twelve months. What would cause the fed and US investors to ask for rate cuts? The fed appears to remain focused on their dual mandate of full employment and moderate inflation.

 

Employment softening: Bouncing from historic low unemployment, but with a clear trend.

• Unemployment at 4-year high, 4.3%
• Downward revision of 911k less jobs created over 12 months period ending 3/31/25.
• Job creation for August was 22k, a sharp decline from previous months.
• Firms most affected by higher rates and tariffs are smaller companies who are finding it difficult to hire.

 

Inflation: Sticky but under control.

• CPI is up 2.9% over the last 12 months
• Shelter & Food – Biggest drivers of inflation over the past year, with rising rents and higher prices for meats, poultry, and dining out.
• Energy & Services – Mixed impact: gasoline fell, but electricity, natural gas, and healthcare costs added pressure

As the fed governors debate these points internally, they have decided to cut the target fed funds rate by .25% to a new target of 4.00-4.25%. The signal from Chair Jerome Powell is that the fed’s goal of full employment has shifted in importance versus inflation in the last few months, and that going forward more cuts are expected.

The fed’s reaction to the softening labor market should be encouraging to workers and investors as it shows confidence that inflationary pressures have largely passed and they can count on full-on support for labor in the near-term.

 

Sources:

Bureau of Labor Statistics: https://www.bls.gov/cpi/
Y Charts: https://ycharts.com/

 

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