Weekly Update 08/22/2025: Fed Chair Powell Speech Signals Cut Ahead
- Apple boosts manufacturing in India
- Fed Governor faces accusations
- Walmart raises guidance
Economic reports
This week did not have a large volume of data released, but it did have some items of note. A focus this week was on housing. The National Association of Homebuilders/Wells Fargo sentiment indicator fell to 32 in August versus 33 last month. The median estimate was for 34, matching the lowest number since 2022. This suggests the gloomy environment for building residential structures will continue. The share of builders using sales incentives reached a post-pandemic high of 66% this month. Mortgage rates remain a stiff headwind with current levels twice as high than at the end of 2021.
Housing starts data, released by the U.S. Census Bureau, showed that figure climbed in July to a five-month high. New residential construction rose 5.2% to an annualized rate of 1.43 million homes. That was above all forecasts in a Bloomberg survey of economists. Single-family starts, which comprise the bulk of home construction, rose 2.8%, while multi-family starts, such as apartment buildings, rose nearly 10% in the strongest pace since mid-2023. Residential construction, nevertheless, has been a drag on the economy in four of the last five quarters. Builders have signaled a slowdown in spec homes, which are houses built without a signed contract. The hope is to thin the construction pipeline, reduce inventories and boost sales prices which have been hurt by the aforementioned sales incentives. Thus, even with this positive housing starts news, many industry experts believe residential construction activity will remain soft for the next quarter or two, unless there is movement on mortgage rates. Building permits, an indicator of future construction, fell 2.8% in July to an annual rate of 1.35 million, the weakest since 2020, following a 0.1% drop in June.
The National Association of Realtors released data on the resale market yesterday. Existing home sales rose 2% last month to an annualized rate of 4.01 million. The median projection in a Bloomberg survey of economists called for a 3.92 million pace so there was a modest upside surprise. Most of the jump was from single-family homes, but there was also faster unit sales growth in condominiums and co-ops, which comprise a much smaller share of the market. For home buyers, the good news was that median prices rose only 0.2% to $422,400, the smallest increase in two years. The supply of previously owned homes edged up 0.6% to 1.55 million, the highest level since May 2020. The housing market is suffering from a number of headwinds. High mortgage rates continue to make moving an unattractive option for many households given they are currently paying at rates much lower than the current 6%+ level. Moreover, a slowdown in hiring is triggering fewer job relocations which is reducing overall activity in the housing market. According to the Labor Department, initial applications for unemployment insurance rose while continuing claims climbed to levels not seen since 2021, suggesting a foreboding trend. Existing homes comprise about 90% of all housing related transactions. We will get new home sales data on Monday.
Jackson Hole, WY
This is the site where Federal Reserve Chairman Jerome Powell will hold his final speech for the Jackson Hole Economic Policy Symposium. This annual event, hosted by the Federal Reserve Bank of Kansas City, attracts the world’s most influential central bankers for three days of exciting monetary policy discussions. This year’s conference, titled “Labor Markets in Transition,” will focus on structural forces such as demographics and immigration that are shaping global economies and what effect central banks can have on these megatrends.
Prior to today’s event, minutes from the last FOMC meeting (July 29-30) were released on Wednesday afternoon. Most officials highlighted the risk to inflation as tariffs continued to draw extra attention. According to the minutes: “a majority of participants judge the upside risk to inflation as the greater of these two risks.” The other risk referred to is the labor market. Given this meeting took place three weeks ago, the perception of U.S. employment has changed. A surprisingly weak July nonfarm payrolls report was further accentuated by downward revisions to prior months and a tick up in the unemployment rate to 4.2%. At the time, policymakers called the labor market “solid” but said inflation remained “somewhat elevated." Following that meeting, Chair Powell said the inflationary impact from tariffs could be temporary, but the Fed still had to be guarded against a more persistent effect. In addition, in the weeks that have passed since that meeting, wholesale prices spiked by the largest amount in three years according to July producer price data.
Another wrinkle before the Jackson Hole speech came in the form of accusations against Fed Governor Lisa Cook concerning mortgage applications she took out in 2021. Federal Housing Finance Agency Director Bill Pulte urged Attorney General Pam Bondi to investigate Cook who was appointed by Trump’s predecessor Joe Biden. The accusation is serious enough to call for her dismissal which would open up a seat on the Federal Reserve Board which could be filled by a Trump nominee. Former Fed Governor Adriana Kugler resigned from her position on August 8, five months before her term was due to expire, without providing any explanation. Trump nominated Stephen Miran, his Council of Economic Advisers chair, to fill the term through January 2026. The president has explicitly said he would only pick a successor to Powell who agrees to reduce the Fed’s federal funds rate. This brings into question whether a new chair can credibly preserve the independence of the central bank which is of utmost importance to securities markets.
The speech itself centered on two topics: the near-term outlook for monetary policy and the review of the Fed’s monetary policy framework. An important statement in his speech was this: “Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” That phrase essentially opened the door for a rate cut at the Fed’s next meeting in September. While the Fed has a dual mandate of stable prices and full employment, the later is a pre-requisite for the former. In other words, the Fed knows that, as powerful as it is in the financial markets, it does not make hiring or firing decisions and, if worse comes to worst, is powerless to stop all the forces that combine to produce economic recessions. We have written about this many times before in the weekly newsletters and quarterly commentaries. The Fed was around during the double dip recessions of the 1980s, during the dot-com implosion and during the global pandemic of 2020. While their actions can help determine the depth and duration of slowdowns (and boom times), at the end of the day, households and their ability to function and thrive day by day are what determines the fate of the economy.
What about tariffs and how that is affecting the outlook? Powell covered that topic. “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem. A reasonable base case is that the effects will be relatively short lived—a one-time shift in the price level. Of course, ‘one-time’ does not mean ‘all at once.’ It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.” At prior press conferences, Powell had mentioned that these effects could be “one time” in nature, but they could also contribute to a feedback loop whereby higher prices led to employees demanding higher wages which leads to even higher prices and so on. What is different this time was this statement: “Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.” That plus the fact measures of long-term inflation, as reflected in both market- and survey-based measures, appear well-anchored. Clearly, tariffs, especially their unstable imposition and changing levels, are an important wildcard, but it appears as if Powell has set himself in the camp that they will not derail overall economic growth.
The second topic Powell spoke about was just as if not more important than the first. This is its purpose: “The Federal Open Market Committee (FOMC) on Friday announced the unanimous approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy and serves as the foundation for its policy actions. The updated statement, also commonly known as the consensus statement, emphasizes that the FOMC's monetary policy strategy is designed to promote the congressionally-assigned goals of maximum employment and stable prices across a broad range of economic conditions for the benefit and well-being of all Americans.” The meaning is subtle, but the message is clear. The Fed is not sequestered in some room every few months doing who-knows-what and then rendering judgments as they see fit with global implications on the value of our currency and as the world’s de facto central bank. They focus on 2% inflation because it “enhance(s) the Committee’s ability to promote maximum employment in the face of significant economic disturbances.” The Fed works with other departments to create entities in response to the pandemic or episodes like the Silicon Valley Bank meltdown not because it likes to but because “The Committee is prepared to use its full range of tools to achieve its maximum employment and price stability goals, particularly if the federal funds rate is constrained by its effective lower bound.”
These are the principles upon which it hopes to achieve its dual mandate. In committing to make adjustments “as appropriate” each January and “undertake roughly every 5 years a thorough public review (emphasis mine),” the Fed is expressing that it wants to be scrutinized. As attacks on the Fed's independence become more numerous, having this openness and schedule to self-critique is imperative. Confidence in the Fed’s autonomy gives weight to the dollar’s hegemony and supports its enviable position as the world’s reserve currency. That is not something to take lightly or seek to undermine. While the rest of Powell’s term as Chair through May 2026 is unlikely to be uneventful from either an economic or political viewpoint, it is reassuring that under his leadership he has held true to the promise: “FOMC members will make these decisions, based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach.”
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