The First Interest Rate Cut of 2025 Could Happen Next Week. Here's What It Means for the Stock Market.
News Summary
According to Wall Street, the Federal Reserve is almost certain to cut interest rates at its September meeting. Despite the Consumer Price Index (CPI) still hovering significantly above its 2% target, clear signs of weakness in the jobs market are prompting the Fed to re-evaluate its policy stance. After inflation surged to a 40-year high of 8% in 2022, the Fed aggressively raised the federal funds rate from 0.1% to 5.33% between March 2022 and August 2023. With the annualized CPI growth rate trending down to 2.7% in 2025, closer to the 2% target, the Fed cut rates three times in late 2024 but has yet to make a move this year. Recent non-farm payrolls reports showed significantly fewer jobs created in July and August than expected, with the unemployment rate rising to a four-year high of 4.3%. Fed Chair Jerome Powell's remarks at the Jackson Hole Symposium hinted at a potential policy adjustment, with CME Group's FedWatch tool now placing the odds of a September rate cut at 100%. The article suggests the Fed might be too late, as the full effects of an interest rate adjustment can take up to two years to materialize. Historically, periods of high interest rates have often preceded recessions, implying the Fed may act too slowly to prevent a downturn. While conventional wisdom holds that lower rates are good for the stock market, history also shows that during economic downturns, the S&P 500 can decline sharply even as interest rates fall.
Background
The Federal Reserve is legally mandated to support a healthy jobs market and keep inflation under control. In 2022, the U.S. CPI surged to a 40-year high of 8%, driven by pandemic-era stimulus and supply chain disruptions. This prompted the Fed to aggressively raise the federal funds rate from 0.1% to a two-decade high of 5.33% between March 2022 and August 2023 to cool prices. In 2025, under the Trump administration, inflation has notably receded, with 2024 CPI at 2.9% and the latest annualized rate at 2.7%, nearing the Fed's 2% target. However, the U.S. jobs market has shown clear signs of weakness in mid-2025, with July and August non-farm payrolls significantly below expectations and unemployment rising to a four-year high of 4.3%, creating a policy dilemma for the Fed between its inflation and employment mandates.
In-Depth AI Insights
Is the Fed's conundrum a true dilemma, or does it reflect a strategic trade-off under its dual mandate for employment and inflation? - While presented as a conundrum, it's more accurately a strategic trade-off. The Fed's decisions are not merely mechanical reactions but a comprehensive evaluation of economic data, market expectations, and political pressures. - Persistent weakness in employment data, particularly under the Trump administration in 2025, likely exerts significant political pressure, potentially leading the Fed to prioritize job stability even if inflation is marginally above target. - This rate cut could be viewed as a