CWS Market Review – August 26, 2025

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At Jackson Hole, Powell Hints that Rate Cuts are Coming

Last Friday, Federal Reserve Chairman Jerome Powell gave his highly anticipated speech at the annual Jackson Hole conference in Wyoming. As I’ve explained in previous issues, the Jackson Hole conference is a big deal in the Fed world.

The central bank has used the occasion to announce important policy decisions. This year, Powell told the world to expect interest rate cuts from the Fed. This is hardly news, but it’s noteworthy that Powell used Jackson Hole to make his announcement.

The market celebrated the news and the stock market rallied strongly on Friday. That gain ended a six-day losing streak. The market’s gain on Friday nearly wiped out the entire loss of the preceding six days. The market continued to rally and came close to a new all-time high today.

I get the feeling that Powell is in the hawkish camp at the Fed. By that, I mean that he’s more reluctant than other members to lower rates right now.

The Fed has an unfortunate habit of fighting the last war. The Powell Fed is uniquely concerned with its credibility. Sadly, that took a big hit during the opening months of inflation. If you recall, the Fed said that inflation was merely transitory. Well, that wasn’t the case, and the Fed eventually reversed course and attacked inflation with its full force. Now it needs to relent.

Specifically, Powell said, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” As you know, your humble editor is conversant in the abstruse language of Fed-speak, which has a distant relationship with proper English. I’ll happily translate.

The Fed has been holding rates high for several months, and the bond market is getting antsy. The White House has also been placing pressure on the Fed to cut rates (more on that later).

The problem for the Fed is the president’s tariff policies. We’re not exactly sure what the effect will be, or even the finalized policy. This places the Fed in the position not knowing what it doesn’t know. There’s also the impact of more restrictive immigration policies.

The Fed’s mandate is to keep inflation low and the labor market happy. That’s not always an easy balance. Powell admitted that “the balance of risks appears to be shifting.”

Powell said:

Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.

At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024. The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.

Check out this chart. Inflation is the blue line and unemployment is in black. It looks like the black line is inching up while the blue line is still moving lower:

This is also an unusual time for the Fed because the stock market has been doing well. The unemployment rate is still relatively low. While inflation is down, it’s above the Fed’s target of 2%. The economy isn’t as strong as it could be, but we don’t appear to be near a recession. Wall Street is expecting good numbers for Q3 GDP.

Given these facts, why is there such pressure to cut rates? Part of the reason is simply that the Fed went too far in raising rates, so it may be appropriate to walk that back.

Also, despite some good economic numbers, we’re seeing problems in areas of the economy that are heavily dependent on interest rates, the most important being housing. Over the last two years, the cost of housing – not just home prices but also mortgage costs – have soared. Yesterday, in fact, the Commerce Department released a report showing that sales of new homes dropped by 0.6% last month.

I like to keep an eye on how homebuilder stocks are doing. The homebuilders stand at the intersection of the stock market and interest rates. A good ETF to watch is the SPDR S&P Homebuilders ETF (XHB). Starting last summer, the homebuilders badly lagged the overall market. But in recent weeks, the homebuilders have perked up. I think it’s in anticipation of lower rates.

For now, we can expect the Fed to cut rates in September. After that, things are less clear. I would say the odds are that the Fed will cut again in October or December, but not both. Rate cuts will help alleviate some pressure points within the economy.

Now let’s look at the latest political battle at the Fed.

President Trump Fires Lisa Cook. Or Maybe Not

Sixty years ago, President Lyndon Johnson famously clashed with Fed Chairman William McChesney Martin. LBJ was used to getting his way and he didn’t take kindly to the Fed trying to fight inflation by raising interest rates.

The fight started when the Fed ignored the president’s demand to leave rates alone. Instead, the Fed hiked rates. LBJ was furious. And he summoned Martin to the LBJ ranch where the president was recovering from gallbladder surgery. Depending on whom you ask, LBJ berated Martin and even shoved him around the president’s office.

I bring these events up because on Monday, President Trump fired Lisa Cook, one of the Fed’s governors. Or I should say, he tried to fire her. The courts will most likely sort this all out before we’re done. If Trump prevails, his appointees will have a majority at the Fed.

Let me take a step back to describe what happened. The Federal Reserve is run by its seven-member board. The board is designed in such a way as to reduce political influence. The term of each board member is for 14 years. That way, a president will nominate new board members once every two years.

Board members usually serve around three to five years. Most board members fill in for part of a 14-year term. Note that the Fed board is not the same thing as the interest-rate setting Federal Open Market Committee which is comprised of Fed board members and rotating Federal Reserve bank presidents.

While the president appoints members to the Fed, and the Senate votes on the nominees, the president doesn’t have the power to fire Fed members except—and this is important— if it’s “for cause.” That means gross misconduct.

President Trump is claiming that Cook committed mortgage fraud and is therefore eligible to be fired. Cook is accused of claiming two primary residences over a two-week period. This happened before she worked at the Fed.

Cook ignoring the president. She has returned to work and said she intends to sue. Her lawyer said the president’s action is unlawful. Importantly, Cook hasn’t been charged with anything, and the actions involve her personal business dealings, and nothing about the Fed. Her term at the Fed doesn’t end until 2038.

This could get messy if the president nominates a replacement and the Senate confirms him or her. What then? I have no idea.

President Trump has already appointed two current Fed governors, both from his first term. He also got an opening recently when Adriana Kugler resigned, although that seat was due to be open soon. Then in May 2026 comes the big one when Jerome Powell’s term is up and the president can appoint a new Fed chairman. That would give Trump appointees a majority at the Fed.

The issue is that the Fed is designed to operate independent of political pressure, but it isn’t truly independent and never has been. I suspect that this battle will eventually be decided by the Supreme Court. The Fed is best left outside politics.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. Our Buy List had a nice 8.75% winner today with Heico. It’s up 40% for the year. If you want to learn more details of our Buy List, you can sign up for our premium letter here.

Posted by on August 26th, 2025 at 6:13 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.