Last week’s speech by Jerome Powell highlighted the Federal Reserve’s dilemma…

On the one hand, inflation is higher than the 2% target. Last Friday, the year-over-year core Personal Consumption Expenditures (PCE) inflation came in at 2.9%.

On the other hand, the jobs market has continued to soften throughout 2025.

If the Fed cuts interest rates too much in an effort to protect jobs, inflation will remain high. Worse, the Fed could potentially have to raise rates again to bring rising inflation back under control.

But if the Fed leaves rates unchanged or doesn’t cut enough, it risks the jobs market deteriorating further. That could pull down an already slowing economy.

Setting the right interest rate policy to balance these competing interests is no easy task.

What’s more, Jerome Powell may end up vacating the Fed chair role well before we can establish if he and the Federal Reserve officials managed to walk the line.

So today, let’s look at some of the factors within their deliberations…

But before we turn to that, if you enjoy this e-letter, I’d be very grateful if you recommended it to a friend. You can click here to forward it. Thank you!

Different Timing

In the balance between jobs and inflation, you might expect the Fed to prioritize jobs… After all, most folks would prefer to keep their jobs even as living costs rise, rather than the reverse.

The problem is that there’s no easy way to pick a side.

For example, if the Fed gets too aggressive too soon with cutting rates, eventually it will have to take drastic steps to bring inflation back under control (including rate increases, potentially).

Those kinds of big changes can rip a hole in the economy, putting folks out of work.

Yet if the Fed leaves rates too high in attempts to pinch inflation, the jobs market and economy could tank. That could force the Fed to rapidly cut rates to perk up the economy.

There’s no simple answer. As Powell highlighted last week, there isn’t a “no risk” path that will support jobs while also keeping inflation at bay. The timing and size of cuts have different effects on inflation and jobs, which can make it tricky to maneuver between them.

They can also have major implications for investors who are loading up on stocks…

Don’t Get Caught Out

Before Jerome Powell’s speech last week, the market was factoring in two rate cuts by year’s end – at the Fed meetings in October and December.

However, Powell indicated that he’s remaining cautious and isn’t committing to a fixed timeline. The market’s reaction was telling…

Stocks opened higher on the day (with the S&P 500 hitting another all-time high). But both the S&P 500 and Nasdaq reversed lower. That set off a rare down week for stocks.

Some investors are relying on rate cuts to prop up the rally. And they could get caught out if the Fed backs off from further cuts. That could happen if inflation continues to climb and/or the jobs market shows signs of rebounding.

So keep a close eye on the data. We’ll get the Jobs and Labor Turnover Survey (JOLTS) data today. Then the latest nonfarm payrolls (NFP) and unemployment data are due out this Friday.

A surprise could have a major impact on the Fed’s rate timeline.

To be clear, I still think there’s one rate cut ahead, max. But I remain incredibly leery of banking on rate cuts.

That’s especially true with the Fed in no hurry as it considers each piece of data. Plus, we’re heading into a month that has historically shown heightened volatility.

With all that uncertainty… plus the possibility of a government shutdown… it’s worth staying cautious rather than throwing money into this market with abandon.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict