The Final Acts of a Lame-Duck Fed Chair
An antsy market... Setting the stage for Jerome Powell's big speech... The labor market is weakening... Inflation is accelerating... A mismatch of rate-cut expectations... The short-term, long-term game... The lamest of ducks...
The 'correction' continued today...
The benchmark S&P 500 Index closed lower for a fifth straight day, and most of the major U.S. stock indexes fell slightly. (The small-cap Russell 2000 Index was the exception, up slightly.) It looks like investors and traders are taking some profits ahead of tomorrow's anticipated speech by Federal Reserve Chair Jerome Powell.
As we wrote about on Tuesday, "general economic uncertainty" is in the air right now. And the questions and discussion will be personified in Powell's speech that will headline the Kansas City Fed's annual get-together in Jackson Hole, Wyoming tomorrow.
The jobs market appears to be weakening, but the inflation picture remains mixed.
That's not a pleasant scenario for everyday Americans. Nor is it an ideal situation for folks on Wall Street who like to predict and bet on what the Fed is going to do next with its policy.
For an institution that is supposed to balance a "dual mandate" of maximum employment and stable prices, the situation has presented a conundrum. And so far, Powell and the Fed's tack has been to hold the benchmark lending rate steady and see what happens...
What's happening now is the labor market looks like it's gradually eroding...
You know about last month's "nonfarm payrolls" report... That's the one that showed a massive downward revision in new jobs added over the prior few months... and resulted in President Donald Trump firing the head of the Bureau of Labor Statistics.
In less attention-grabbing but still important news, just today, continuing jobless claims maintained their slow and steady rise. They once again hit their highest level since November 2021 and, outside of the pandemic peak, their highest level since April 2018.
It doesn't take long to find a report about a slowing job market. Here's one from the Wall Street Journal today...
One in five U.S. employers surveyed by the Conference Board plans to slow hiring in the second half of 2025, nearly double the rate of companies that anticipated bringing on fewer people at this time last year.
The latest report from the research group marks the second year in a row that many chief human resource officers polled were planning on fewer new hires. The last time executives were broadly optimistic about hiring was the second quarter of 2023, when more than half expected to increase head count, according to past surveys by the Conference Board, which has more than 1,000 public and private corporations as members.
Since then, optimism has steadily declined.
Still, the unemployment rate remains relatively low at 4.2%. Plus, broad economic growth has held up for now.
However, corporate spending on AI infrastructure has been contributing more to GDP than consumer spending. That seems unsustainable.
Meanwhile, questions remain about the path of inflation...
As we reported last week, the inflation picture right now is mixed, at best. In the August 12 Digest, we discussed the consumer price index ("CPI") report for July...
The benchmark measure of prices rose 0.2% last month and increased 2.7% year over year. The one-month change matched Wall Street's estimate, while the year-over-year number came in slightly below the expected 2.8% increase.
A 9.5% year-over-year drop in gasoline prices helped offset a 5.5% jump in electricity costs. Aside from gasoline and oil, apparel was the only sector to record a year-over-year decline.
While the headline CPI was "good" news, "core" inflation – which strips out energy and food prices – rose 3.1% year over year, more than Wall Street's estimate of 3%. It hit its highest level since February.
And this followed a 0.3% monthly gain in the CPI in June, which is above the Fed's 2% target pace. As we also wrote last week...
More than two-thirds of the CPI's components are now rising faster than 2% – the Federal Reserve's inflation "target." So higher inflation is sticking around for now.
Then two days later, the producer price index ("PPI") came in surprisingly high, with 0.9% month-over-month growth, way above Wall Street's consensus estimate of 0.2%. Our Select Value Opportunities editor Mike Barrett followed up on this in his weekly update yesterday...
The July PPI reading reflects its largest jump since the 1.1% rise in June 2022. Back then, inflation was still raging near 40-year highs. And the Federal Reserve was in the middle of one of the most aggressive rate-hiking campaigns in its history.
July's surprise PPI surge means inflation is, once again, rearing its ugly head. And investors must grapple with producers' higher price tags.
This jump is linked to tariffs, Mike noted, and he examined an example of a company that's eating tariff costs. Certain industries and many small businesses are dealing with tariffs more than others, as we've reported and many of you have written to us about. As Mike wrote...
Tariffs will continue to negatively impact inflation data in the months ahead. Higher inflation, in turn, could lower company margins and revenue growth... and likely pummel stock prices.
Meanwhile, most stocks are nowhere near "undervalued" levels. That's setting the stage for disappointment as investors adjust their market outlooks.
So, that's the stage heading into Powell's big speech tomorrow in Jackson Hole. As we wrote on Tuesday and is worth repeating...
These events are where the Fed has made significant changes in its policies and outlook at times in the past.
Like when it "moved the goalposts" on its inflation target to seek above 2% price growth during the pandemic... Or when Powell warned of "pain" to come in the economy three years ago as the Fed went on an interest-rate raising spree to try to tame the record-high inflation it helped create.
After being called "too late" and "stupid" by President Donald Trump for not lowering interest rates already, we suspect Powell will use this speech to talk about the importance of "Fed independence."
Powell will be in front of an agreeable crowd. And since this may be his Jackson Hole swan song, it's his chance to leave an impression.
Beyond that bigger picture, it appears that a growing number of investors and traders aren't quite sure what the Fed chair will signal about rate policy... and they're getting antsy about it.
The recent market slide from all-time highs has coincided with declining confidence that the Fed will cut the federal-funds rate in September. Fed-funds futures traders give a rate cut only around 70% odds today... down from more than 90% a week ago.
Still, the prevailing expectations are for a rate cut as soon as the Fed meeting next month. But as we said earlier this week, a rate cut is not a given...
If Powell suggests precisely this, the realization among a wider audience could shake up the market even more than the slight downturn we've seen over the past week. On the other hand, greater belief in lower rates ahead could juice stock prices higher.
This is a similar setup to what we saw last December... After Trump's election, the market weighed the possible impacts of tariffs and other new policies on inflation and the economy in general. When the Fed signaled inflation concerns and a lower growth outlook for 2025, stocks took a sharp turn lower...
And now there is a little more spice in the conversation...
The Fed is 'divided,' but there is a majority...
We don't always report on meeting minutes, but yesterday's release of the Fed's minutes from its July meeting is worth mentioning. This is the central bank's report on the meeting where two voting members "dissented" from the chair's decision for the first time since 1993.
Here's the key summary from the Fed's official readout of its meeting...
Participants generally pointed to risks to both sides of the Committee's dual mandate, emphasizing upside risk to inflation and downside risk to employment. A majority of participants judged the upside risk to inflation as the greater of these two risks, while several participants viewed the two risks as roughly balanced, and a couple of participants considered downside risk to employment the more salient risk.
We will note that the "majority" of Fed voting members see inflation as the greater risk to address right now. If that's still the case – and it should be given the inflation data of last week – it would mean we shouldn't expect rate cuts – at least not yet.
We shall see the message that Powell delivers tomorrow... and how the market reacts.
In the longer run...
At the same time, there should be little doubt about the longer-term path for interest rates. If the White House has any say about it, and it does, the "cost of dollars" will be going lower...
Since we last handicapped the contest to be the next Fed chair a couple weeks ago – when Trump noted that "two Kevins" (Warsh and Hassett) were in contention with two other people – things have changed.
Treasury Secretary Scott Bessent, who was also in contention to be chair but opted out of the running, has reportedly taken the lead interviewing candidates. He'll recommend to Trump who should replace the lame-duck Powell when his term as chair ends in May.
The number of candidates has expanded to nearly a dozen. Here's a list, compiled from various reports over the past two weeks...
- Kevin Warsh: Former Fed governor, served during the 2008 financial crisis
- Kevin Hassett: Director of the National Economic Council, has held various economic advisory roles but lacks experience serving on the Fed
- Christopher Waller: Current Fed governor, known for advocating lower interest rates in line with Trump's policies
- Michelle Bowman: Fed vice chair for supervision, recently dissented in favor of rate cuts
- Philip Jefferson: Fed vice chair, closely allied with current Fed policy
- Lorie Logan: President of the Dallas Fed, considered more hawkish on inflation
- James Bullard: Former St. Louis Fed president, known for market-oriented policy
- Marc Sumerlin: Former Bush administration economic adviser
- Larry Lindsey: Former Fed governor
- Rick Rieder: Chief investment officer at BlackRock
- David Zervos: Chief market strategist at Jefferies
We don't know who will emerge from this group, but there's no shortage of Trump's favored "low-interest people" among them. And you can bet that the winner won't risk the president's ire for being "too late" to push for rate cuts.
Just today, one of the candidates – James Bullard – said in a Fox Business interview that rates are too high and he sees room for 100 basis points (1 percentage point) of cuts into 2026, with possibly more next year.
So the short-term picture when it comes to the Fed is uncertain and could lead to some volatility. But the idea of "lower interest rates, eventually" could act as a backstop and temper fears of anything else...
The power shift at the Fed is clearly underway. Powell is the lamest of ducks, but for a little while longer, he can wield influence. Tomorrow is one of those days.
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New 52-week highs (as of 8/20/25): AutoZone (AZO), Barrick Mining (B), Alpha Architect 1-3 Month Box Fund (BOXX), WisdomTree Japan SmallCap Dividend Fund (DFJ), Quest Diagnostics (DGX), Dimensional International Small Cap Value Fund (DISV), Western Asset Emerging Markets Debt Fund (EMD), VanEck Gold Miners Fund (GDX), Altria (MO), New Gold (NGD), and Novartis (NVS).
In today's mailbag, more feedback on Donald Trump and the Federal Reserve, in response to a note in yesterday's mail... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"PLEEEZE! We should not trade one central planning team for another! This comment [in yesterday's mail] suggests exactly that: 'My advice to Donald Trump is to not only fire Jerome Powell, but nationalize the Federal Reserve (take it over) and put knowledgeable patriotic constitutional believing businessmen in charge of the now True Bank of America.' – Subscriber Mark M.
"The trouble with the Federal Reserve is that it attempts central management of labor and the economy – a concept that has never been successful anywhere in the world. Let the free market dictate interest rates. Collectively the market is far better at managing itself than any group of humans." – Subscriber Mike M.
All the best,
Corey McLaughlin with Nick Koziol
Baltimore, Maryland
August 21, 2025