Rate cuts in focus: Diverging data and the politics of monetary policy

Markets are grappling with a complex and often contradictory economic landscape. As Chair Powell noted in his speech at the 2025 Jackson Hole Economic Symposium, growth indicators remain broadly resilient, but labor market data are beginning to show signs of strain and downside risks are rising. At the same time, while not surging, the effects of tariffs on inflation are now visible and could result in a more persistent inflation dynamic. Against this tense backdrop of worrisome labor market developments and sticky inflation concerns, Chair Powell has now all but confirmed a Federal Reserve rate cut in September. Yet, the macroeconomic case for aggressive monetary easing remains debatable.

With both sides of the Fed’s dual mandate drifting from target and political pressures mounting, the size of the central bank’s cut next month could prove pivotal—not just for the economy, but also for investor sentiment and asset valuations.

Evolving labor market dynamics

The July jobs report reignited concerns about the labor market’s underlying health. While survey data had been signaling a slowdown in labor demand since late 2024, the modest 73,000 payroll gain—coupled with sharp downside revisions that pulled the three-month average to just 35,000—pushed slowdown fears to the fore. Historically, such levels have coincided with rising unemployment and heightened recession risk, prompting many investors today to reassess the labor market’s strength. Still, the story is more complex than the headline figures suggest.

The slight uptick in July’s still-low unemployment rate suggests that labor supply has slowed nearly in tandem with labor demand, keeping the overall market—as Chair Powell described in his Jackson Hole speech—in a “curious kind of balance.” As such, the disappointing payroll figures may not signal outright labor market deterioration but rather reflect an economy that requires fewer new jobs to maintain stable employment levels.

Furthermore, as the softening in labor demand has not been accompanied by a rise in layoffs or a pullback in spending, investors and policymakers should be wary of interpreting payrolls softness as an imminent recessionary signal.

Inflation calm is unlikely to last

Recent inflation developments offer little reassurance. While July’s inflation report wasn’t alarmingly strong, underlying signals point to building price pressures amid higher trade tariffs. Business surveys increasingly reflect rising cost dynamics, and producer price data suggest that inflation concerns could intensify in the months ahead.

In fact, producer price inflation in July rose at its fastest monthly pace since March 2022, signaling that businesses are already contending with higher tariff-driven input costs. While the relatively subdued CPI print suggests that firms are currently absorbing these pressures within their margins, that dynamic is unlikely to be sustainable. Eventually, companies may be forced to pass these costs on to consumers, pushing inflation higher and further away from the Fed’s 2% target.

It’s also important to note that the latest round of higher tariffs—35% on Canadian goods, 25% on Indian imports (which are set to climb to 50% on August 27), and 15% on products from the EU, Japan, and Korea—only took effect in August. As these measures filter through supply chains, they are likely to exert additional upward pressure on input costs. Consequently, the late summer and autumn inflation reports, along with business surveys, may reveal further signs of price acceleration, adding to concerns about the inflation outlook.

The politicalization of monetary policy

Both sides of the Fed’s dual mandate—maximum employment and price stability—are moving further away from target, yet markets have dramatically raised expectations for a September cut—now supported by Chair Powell’s dovish Jackson Hole speech. With the July jobs report now reinforcing the signals from earlier labor market surveys, investors appear undeterred by underlying labor supply constraints or early signs of tariff-induced price pressures. They are focused on the prospects for imminent Fed easing.

Historically, once the unemployment rate begins to rise, it often accelerates in a non-linear fashion. This lends credibility to FOMC members’ concerns that waiting for clearer signs of labor market deterioration before cutting rates could result in action that is too late to be effective. At the same time, however, recent experience has underscored the dangers of allowing inflation expectations to become unanchored, which could lead to more persistent inflationary pressures taking root. The fact that Fed rates are very likely to be reduced in September, despite inflation risks, suggests that another underlying dynamic may be influencing expectations: politics.

President Trump’s continued criticism of Chair Powell—combined with the nearing end of Powell’s term and speculation about his successor—has likely sharpened the focus of several current FOMC members (and potential future ones) on the case for rate cuts. Those seen as contenders for the Fed Chair role have a clear incentive to signal dovishness, effectively “auditioning” through their policy stance and public messaging.

While current economic indicators may not fully justify an immediate rate cut, persistent pressure from the Trump administration—and the resulting politicization of monetary policy—suggests that the Fed’s decision-making is being influenced not only by macroeconomic data but also by the broader political context shaping expectations.