From the Desk of AgFi’s Business Strategist
Published 8/25/25 – On Friday, the Federal Reserve (Fed) Chairman Jay Powell spoke at the Fed’s annual Economic Symposium. In the speech, Powell hinted that the Fed may lower short-term interest rates soon. That appears to be a reversal of the steadfast hold on rates that the Fed has had since last lowering the Fed funds rate in September 2024.
So, why would the Fed lower rates now? Over months, Powell has said that the economy is stable, employment is robust and that tariff induced inflation is a concern. He must now view that differently. The most likely differences are that there are signs of employment weakness and that inflation has not worsened.
The Employment Situation Report, often called the Jobs Report, issued in early August, shed new light on the trend of employment. The report showed new jobs in July to be only 73,000 compared to the 106,000 expected. More importantly, revisions to the May and June reports reduced reported new jobs for those months by more than 250,000. That means that employment has been much weaker than previously thought.
The Fed’s favored inflation measure, the core Personal Consumption Expenditures (PCE) report, was last issued in late July. The report showed the core PCE to be up 2.8% year-over-year vs 2.7% expected. That is the same rate as in the prior month and steadily down from a high of 5.6% in early 2022. However, that is still above the Fed’s target of 2%.
The Fed may want to prevent further deterioration in employment but must be concerned about re-igniting inflation. The primary concern seems to be focused on the effect of tariffs. The Fed may believe that the threat is less than earlier feared especially since reports from retail behemoths such as Walmart and GM have reported their tariff costs have been small relative to their earnings. That implies that tariff costs are being absorbed throughout the supply chain and may not cause a significant increase in consumer inflation.
The Fed appears poised to lower the Fed funds rate in September. The market is now estimating an 86% probability of a 25 b.p. decrease in September and a 44% probability of another 25 b.p. decrease in October.
Such a Fed funds rate reduction will have a direct effect on Prime Rate and most short-term borrowing rates. However, this does not mean that long-term rates will drop similarly. It is possible that long-term investors could judge the rate reductions to be inflationary and could hold long-term rates higher. As of now, long-term investors have moved the 10-year Treasury rate down only a bit. That indicates that those investors do not expect long-term rates to drop by much.
Of course, perceptions can change. But, as of now, the 10-year Treasury rate, a bellwether for fixed rate mortgage loans, is still in a relatively narrow range, down about 50 basis points (1/2%) from the high in January, but within the range of the past 10 months.