Weekly Market Update: September 2, 2025
The Federal Reserve appears on track to resume cutting the benchmark short-term interest rate for its lending to banks at this month’s Federal Open Market Committee (FOMC) meeting. At the annual Jackson Hole, Wyoming Economic Symposium in late August, Chairman Jerome Powell said the Fed will “proceed cautiously,” as both inflation and potentially greater unemployment remain concerns. Mr. Powell noted that the shifting balance of risks (to unemployment levels, prices, and economic growth) may warrant a cut in the benchmark interest rate. According to trading activity in the futures market, the odds of a quarter-point reduction, to a range of 4.00% to 4.25%, remain high.
The economy may be in the need of stimulation from an interest rate cut. The nation’s gross domestic product (GDP) increased by an estimated annualized rate of 1.2% over the first six months of 2025, below the pace recorded in recent years. Data from the Labor Department also show that job creation has slowed considerably, with gains averaging around 35,000 positions a month over the three-month period ended July 31st. The weak job-creation figures, along with stubborn inflation and slowing economic growth as measured by the GDP, raise concerns about potential “stagflation.” That term describes times when prices continue to increase even though economic growth is quite stagnant. The Fed wants to avoid a period of stagflation because it leaves consumers with a lower standard of living and may lead to job insecurity. It is also difficult to cure, because further lowering interest rates can worsen inflation while helping GDP growth.
Will the resumption of interest-rate cuts have the desired effect of increasing growth? Recall that when the Federal Reserve cut interest rates by a full percentage point last fall, interest rates on long-term Treasury bonds, which the Fed does not control, rose substantially, hurting the housing market and crimping other industries’ ability to borrow. This reflected private lenders’ skepticism that the Fed had succeeded in reining in inflation. Unfortunately, this backdrop still remains in place, and it should be noted that following Chairman Powell’s comments signaling a cut in short-term interest rates, the spread between the yields on the two- and 30-year Treasury bonds widened.
Conclusion: With the Fed now likely to cut interest rates this month, stocks could be in a position to continue their move higher. With valuations looking high by historic standards, we think a diversified portfolio consisting mostly of high-quality stocks and cash equivalent securities is warranted.
Source: ValueLine.com
