Weekly Market Update: September 8, 2025

Inflation is still running above the Federal Reserve’s target level of 2%. The Personal Consumption Expenditures (PCE) Price Index, the assessment of inflation most closely watched by the Fed, and the core PCE (excludes food and energy) rose 0.2% and 0.3%, respectively, in July. On a 12-month basis, the PCE and core PCE increased 2.6% and 2.9%. While the figures came in as forecast, they indicate that the pace of price growth is still too high, which can reduce the purchasing power of consumers. That said… 

The health of the U.S. consumer sector is proving resilient. The Labor Department reported that personal income and spending rose 0.4% and 0.5%, respectively, in July, rates that would not suggest growing stress in the sector. However, the University of Michigan’s August reading on consumer sentiment came in at 58.2, down 5.7% from the July reading and 14.3% below the August, 2024 tally. It also showed year-ahead inflation expectations among Americans climbed to 4.8%, from 4.5% in July, and that the majority of consumers do not expect to maintain their spending on items with large price increases. This comes as the Trump Administration has yet to reach new trade deals with China, India, and Mexico, which may put further upward pressure on prices. 

The odds continue to rise for a quarter-point reduction to the benchmark short-term interest at this month’s Federal Open Market Committee (FOMC) meeting. This is because the Fed has grown more concerned about the state of the labor market, as job creation slowed considerably over the three-month period ended July 31st. (Investors should note that the August report on employment was due shortly after we went to press.) In his Jackson Hole, Wyoming speech, Chairman Jerome Powell noted that while the labor market appears to be in balance, the balance has resulted from a marked slowing in both the supply of and demand for workers. This situation raises the downside risks to the employment picture, including the prospect of sharply higher layoffs and rising unemployment.

Conclusion: When the Federal Reserve cuts interest rates because it has concerns about a slowing economy, it can often generate a volatile stock market response. Thus, we think a diversified portfolio led by high-quality stocks and cash is warranted.

Source: ValueLine.com