Fed Watch – 8/22/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Lauren Saidel-Baker, and thank you so much for joining me for this August 22nd edition of Fed Watch.

We are recording before Chair Powell will make his comments from Jackson Hole. All eyes, all Fed Watchers are turned to Jackson Hole symposium today for the comments that we might see. Now, the rest of this week, there hasn’t been too much economic data released, but there has been a lot of political pressure. We’ve heard comments from the Trump administration regarding various Fed officials, pressure to resign, pressure certainly to lower interest rates. But once we delve through all of that commentary, it’s important for an economist to assess what we know in economic terms and what might just be political posturing.

So I want to make one thing absolutely clear today. Fed independence is critical to their ability to do their job moving forward. At the end of the day, this is not meant to be a political statement. We would say the same for any administration in power, Republican or Democrat. It simply is the goal of politicians to deliver, well, short-term growth, yes, but more accurately, to deliver in the poll numbers, to deliver at the ballot box. So they would necessarily want things to look better under their administration. They would want, say, lower interest rates and the stimulative effects thereof, which would affect us more in the short term. For Federal Reserve officials, they need to take a longer-term view. That’s why this independence is so important. And that’s why the reliance on the data is really going to be critical going forward.

Today, we’re at a not perfectly healthy point in the economy, but still a relatively stable one. While there is some softness, while growth rates are tepid, those growth rates are generally still positive. The macroeconomy is not falling off a cliff today. As we saw last week, retail sales still inching higher, inflation-adjusted PCE metrics, they really corroborate this positive picture of consumer spending. And at the end of the day, with consumer spending making up two-thirds of GDP, that’s a stable position to be in. While we are seeing some signs of softening from the labor market, maybe those levels coming down, both on the side of job seekers and on hiring needs, we also don’t see major red flags, income levels still increasing on an inflation-adjusted basis.

So with our view for general inflationary pressures coming through, both from tariffs and from other more fundamental factors, we have to consider what rate cuts might look like at the end of this year. Currently, as we sit here in late August, the market overwhelmingly expects a 25-basis-point cut in the September meeting. I think it’s more likely than not that we will get that. But at the end of the day, if we get 25, even 50 basis points in September, maybe another cut later in the fall, that is not going to be the one thing that flips the switch on the economy. We do have these fundamental, these broad-based macro drivers that are going to be persisting. A lot of these leading indicators just haven’t had the full amount of time, the full amount of their lead time to work through in terms of macroeconomic outcomes.

So we’re watching the tail end of this year. If you can use those extra 25, 50, maybe we get crazy and say 75 basis points of cuts, certainly look at your own borrowing needs, your own cost of capital. But I wouldn’t be waiting to make those major investments for the sake of timing the low of this cycle.

At the end of the day, we’ll see what comments come out today from Chair Powell. We’ll see a couple more data releases, both jobs and inflation numbers before that final September decision. Until then, stick with us here at ITR Economics on the next edition of Fed Watch. Thank you.