Powell Clears the Path for September Cuts

After months of holding rates steady, Powell acknowledged that the balance of risks is no longer tilted toward inflation. Instead, the labor market is showing signs of strain.

July payroll growth of just 73,000 missed expectations badly, and downward revisions erased more than 250,000 jobs from earlier in the summer.

The unemployment rate has crept up to 4.2%, with the long-term unemployed rising to nearly two million.

Powell called this an “unusual situation” where both supply and demand for labor are slowing, warning that if weakness accelerates, it could show up quickly as layoffs and a jump in unemployment.

That warning gave markets the confirmation they had been waiting for.

Futures now assign better than an 85 percent chance of a quarter-point cut in September, with odds climbing for another move later this year.

Equities surged after the speech, while Treasury yields slipped. The message was clear: the Fed is preparing to shift from holding the line to supporting growth.

For investors, that is a green light to start leaning into rate-sensitive and cyclical exposures.

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Sticky Prices Complicate the Picture

Inflation has not disappeared. Producer prices climbed 0.9 percent in July, the largest monthly increase in more than three years.

Tariffs on imports ranging from copper to electronics are adding pressure. Core producer prices also advanced 0.6 percent, their biggest increase since 2022.

At the consumer level, inflation looks less threatening.

The CPI held at 2.7 percent year over year, a level that, while above the Fed’s 2 percent target, does not suggest a runaway problem.

Powell emphasized that tariff-related increases may prove temporary, though they will take months to filter through supply chains.

This creates a dilemma. If businesses continue absorbing costs, margins will weaken in the short run.

But if they pass those costs through to consumers, core inflation could remain sticky and limit how aggressive the Fed can be with cuts.

For investors, this means watching sector-level dynamics closely. Industrial input costs, retail pricing, and auto margins may diverge sharply in the months ahead.

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Labor Market at the Center of Policy

The Fed’s mandate is clear: inflation and employment. With prices moderating and jobs cooling, Powell signaled the second half of that mandate may soon dominate.

The reality is that the labor market has lost momentum. Only a few industries—healthcare, social assistance, and education—are adding jobs.

Sectors tied to immigration-dependent labor, such as construction and landscaping, are struggling to fill positions. Federal government payrolls are shrinking as budget cuts continue.

This slowdown does not yet signal recession, but it does suggest the expansion is vulnerable.

Powell said risks could “materialize quickly” if layoffs begin. That acknowledgement sets the stage for a more proactive Fed in September.

Rate cuts would aim to cushion hiring, extend the expansion, and prevent wage stagnation from spiraling into weaker consumer spending.

Markets now view each new data release on jobs and inflation as decisive for the Fed’s path. For investors, the message is to watch labor market reports as closely as CPI or PPI.

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Investor Strategy in a Lower-Rate World

If the Fed cuts rates in September, the opportunity set changes.

Lower yields make borrowing cheaper, reduce discount rates on growth stocks, and stimulate credit-sensitive industries. But not all beneficiaries are equal.

Key ideas now:

• Lean into financials and housing: Lower rates boost demand for mortgages and lending margins. Banks, brokers, and homebuilders could get a near-term lift.
  

• Add cyclical industrials: Sectors like construction equipment and freight see stronger demand when credit loosens and projects resume.
  

• Select tech selectively: Growth multiples look better when discount rates fall, but focus on firms tied to capital spending or enterprise demand rather than unprofitable momentum names.
  

• Rotate away from pure defensives: Staples, utilities, and REITs may lag if cyclicals regain leadership, though they still offer ballast against volatility.
  

• Stay alert to tariffs: Even with rate relief, trade policy could bite into margins. Firms with flexible supply chains will stand out.

In short, a September cut is not the end of volatility, but it is a signal that investors can begin rotating toward sectors better positioned for a cheaper cost of capital.