What the Fed sees and why it matters

August 29, 2025

The Federal Reserve is signaling that the economy may be weakening. In a recent speech, Federal Reserve Chair Jerome Powell indicated that interest rate cuts could be considered soon. He expressed growing concern about the job market, noting a significant slowdown in hiring and the risk of further weakness ahead. Powell is not alone in his concerns; other indicators are also pointing in the same direction. Together, these signals suggest potential shifts in economic momentum that could impact interest rates, the markets, and your financial plan.

Let’s begin with the Fed’s primary concern: jobs. Powell highlighted several troubling trends in the labor market. Over the past three months, employers have added an average of just 35,000 jobs per month, a sharp decline from the 168,000 monthly average in 2024. Long-term unemployment is also rising, with nearly 1.8 million Americans out of work for more than 27 weeks, up 20% from a year ago. Powell stated, “The stability of the unemployment rate allows us to proceed carefully,” but recent data may “warrant adjusting our policy stance.” In other words, interest rate cuts are very much on the table for September.

But it’s not just the Fed chair raising concerns about the economy. Other reports are echoing the same message. One of the most telling is the Conference Board’s Leading Economic Index (LEI). Think of the LEI as an early warning indicator on your car’s dashboard. It combines a range of forward-looking signals from across the economy, such as manufacturing orders, building permits, jobless claims, and consumer sentiment. No single indicator tells the whole story, but when multiple indicators show similar warning signs, it’s worth paying attention. In July, the LEI declined for the sixth month in a row. The chart below shows how sharp LEI declines have correlated with recessions over the past two decades (black lines).

So, what does this all mean?

For the economy, it suggests a shift toward slower growth is becoming more likely. If that happens, the Fed may cut rates to help cushion the impact, making it cheaper to borrow and invest. However, it’s also a sign that economic momentum is softening, which can affect businesses and workers alike.

For your personal finances, lower interest rates could reduce borrowing costs on things like mortgages, credit cards, or car loans. While many of you reading this don’t borrow money on a regular basis, lower rates are important if you ever decide to sell your house. At the same time, savings accounts and other interest-based products may see lower yields. Managing cash flow and debt wisely becomes even more important in an environment like this.

For your investments, things can feel a bit counterintuitive. A slowing economy, which often triggers rate cuts, can sometimes be good for both stocks and bonds. Lower interest rates reduce borrowing costs, which can boost corporate profits and investor appetite, especially in sectors like real estate and technology. Bonds may also benefit as yields fall, and existing bond prices rise. That’s why the S&P 500 closed at a record high last week and the small cap indices saw a huge resurgence. . However, much like a car dashboard, your car can still operate just fine for a long time with the low washer fluid or tire monitoring warning lights on. So, while we are watching the data points, we aren’t making any significant changes or pulling the car off to the side of the road. We are cautiously optimistic as inflation remains low and stock market returns trot higher with better than expected earnings reports.