This week, the Federal Reserve kept interest rates steady and said the economy was in a solid position. The surprise came when it lowered expectations for a rate cut in September. Chairman Powell was asked about tariffs and said, “A pretty reasonable base case is that this will be a one-time price increase, and in the end, we’ll make sure that that’s the case. We’re just trying to do that efficiently, and efficiently means getting the timing right.” He added that if he had to choose, he is more focused on the jobs market than inflation.

Another notable outcome was the first double dissent from members of the Board of Governors since 1993. Two officials wanted to cut rates immediately, arguing that the unsteady labor market required a preemptive approach. Powell described the meeting as one with healthy debate and called it one of the better discussions during his time as chair.

Labor Market Volatility and the Rate Outlook

Markets sold off on Wednesday after the Fed’s announcement because investors had been anticipating a rate cut in September. On Friday, the labor report added to the volatility. July saw only 73,000 net new jobs, and prior months were revised down by 258,000. The Wall Street Journal reported this was the weakest job growth since 2010 outside of the peak pandemic months. In total, only 100,000 jobs have been added in the past three months. President Trump, angered by the report, fired the head of the statistical agency that produced the data.

The details of the report show employers are not firing workers but are not creating new jobs. Government-related jobs were hit hardest, reflecting the pressure of spending cuts. It is difficult to measure how tariffs are affecting employment, but they have clearly not helped. Uncertainty has led many businesses to put plans on hold. Taking all of this together, the case for a rate cut is strong. The two dissenters had it right, and the Fed will likely be forced to cut soon. The market’s reaction shows investors believe the Fed is out of touch with the labor market.

The risk now is that inflation picks up while unemployment also rises. That would put the Fed in a difficult position. For now, weak labor markets and low energy prices should prevent price increases from taking hold. Time will tell whether tariffs and government job cuts weigh more heavily on growth.

Sector Performance and Institutional Risks

Adding to the concerns, the Institute for Supply Management reported that manufacturing activity contracted in July for a fifth straight month. The good news is that corporate earnings have generally been strong. Apple, Amazon, Google, Microsoft, and Meta all beat expectations. Amazon was the only one to signal weakness ahead, and its stock fell 8%. The health care sector, however, remains under pressure. Trump sent letters to the heads of 17 major drug companies demanding that U.S. prescription prices be cut to match overseas levels. The XLV health care ETF fell 3.6% this week and is down 13% over the past year.

Looking ahead, there could be fallout from Trump’s decision to fire Erika McEntarfer, the commissioner of the Bureau of Labor Statistics. He claimed the data was “rigged” and said the country was “doing GREAT.” If investors lose trust in government statistics, it will be impossible to rely on economic data for decision-making. Concerns are already growing about the accuracy of inflation data as survey response rates fall and funding is cut.

If this becomes a pattern, he could target Powell or other Fed officials who disagree with him. That would set a dangerous precedent, and any loss of investor confidence could spark a correction. Markets today are trading on optimism and lofty expectations for future growth. Valuations leave little room for error. If confidence slips, the premium investors are willing to pay will quickly vanish. At these levels, even a modest repricing of stocks could have an outsized impact. Confidence is the currency that keeps this rally alive, and it is also the market’s greatest vulnerability. Markets always move on to the next headline, but my expectation remains that rates will fall. Even if inflation ticks higher, the Fed will be forced to cut.

Have a great weekend!

Sources

Federal Reserve Open Market Committee Meeting
Bureau of Labor Statistics (July Jobs Report: 73,000 jobs added; Revisions: -258,000)
The Wall Street Journal (Report on weakest job growth since 2010)
Institute for Supply Management (Manufacturing Activity Report)
Corporate Earnings Reports (Apple, Amazon, Google, Microsoft, Meta)
Market Data: XLV Health Care ETF (-3.6% weekly, -13% YoY); Amazon stock (-8%)

Disclaimer

The information provided in this communication is for informational purposes only and does not constitute financial, investment, or legal advice. All content is based on data and sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Market conditions and economic factors are subject to rapid change. Past performance is not indicative of future results. The views expressed herein are those of the author and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions. The author may hold positions in securities mentioned in this post.