Speculation grows for a fall Fed rate cut

Investors are often reminded that August and September have, on average, been the two worst performing months for US stocks.¹ While seasonal analysis may offer interesting historical patterns, we view it with a healthy dose of scepticism. Most monthly trends lack strong statistical significance, and even the so-called worst months can surprise. For example, the S&P 500 Index returned 2.3% in August 2024.² Markets are driven more by fundamentals and sentiment than by the calendar. But low liquidity — because traders are on the beach — can mean that news flow can exert an outsized impact on prices.

Volatility, at the index level, has been relatively modest so far this month, with equity markets trading flat to slightly negative depending on the day.³ But below the surface there have been some very large stock price moves in response to earnings results — both very good and bad.

Whether or not one subscribes to seasonal patterns, a pause in market momentum wouldn’t be surprising given the backdrop. Tariffs are now in place, and we expect growth to slow and prices to rise on impacted goods. The Federal Reserve (Fed) finds itself in a difficult position, balancing inflationary pressures with signs of economic deceleration. Still, we see little evidence that a recession is on the immediate horizon. Thus, in our view, any volatility — seasonal or otherwise — should be seen as a potential buying opportunity, not a cause for major concern.

Changes coming to the Federal Reserve

As if rising inflation and slowing job growth weren’t enough, the surprise resignation of a sitting Federal Reserve governor has further complicated the monetary policy outlook. Last Friday, Governor Adriana Kugler unexpectedly left her role at the US central bank just four months prior to the end of her term in early 2026. Given Fed governors are appointed by the president, the White House suddenly found itself in the unusual position of filling a vacant seat at the Fed, while simultaneously vetting candidates to replace Fed Chair Jerome Powell, whose term ends in May 2026.

Current Chair of the Council of Economic Advisors, Stephen Miran, was selected by President Trump to serve out the remainder of Kugler’s four-month term on the Board of Governors, pending Senate confirmation. Meanwhile, speculation is growing that current Fed Governor Chris Waller — a Trump appointee who has vocally advocated for lower rates — is emerging as the front-runner to become the next Fed Chair.

Both developments could have important implications for monetary policy. First, if Miran is confirmed by the Senate before the Federal Open Market Committee’s (FOMC) September meeting, then he would participate in all three of the Fed’s remaining policy decisions this year, as well as the January 2026 meeting — even if his appointment as a Fed governor is only temporary. Second, if Powell decides to step down from the Board of Governors once his term as Fed Chair ends in May, as is historically normal, appointing a sitting governor like Waller as his successor would create yet another vacancy for the White House to fill.

This means that over the next year, the Trump administration will have potentially nominated a new Fed Chair and two new Fed governors. While these individuals would not have outright control over monetary policy decisions, they would likely be selected based on a preference for lower interest rates and therefore instill the FOMC with a more "dovish” bias than seen in recent years.

‘Fedspeak’ hints at rate cuts

Following July’s weaker-than-expected nonfarm payroll report⁴, several Fed officials have expressed growing concern around the US labor market.

• Fed Governor Lisa Cook described the slowing pace of growth as “concerning” and the significant downward revisions to previous months’ data as “typical of turning points” in the economy.⁵
• San Francisco Fed President Mary Daly echoed these worries, stating in a recent speech that “the Fed will likely need to adjust policy in the coming months”.⁶
• Similarly, Minneapolis Fed President Neel Kashkari noted that “in the near term it may become appropriate to start adjusted the funds rates”.⁷

This shift in rhetoric suggests that more Fed officials are increasingly open to the possibility of rate cuts this fall — a notable development given the FOMC’s recent decision to hold rates steady and hawkish comments from Powell. More governors appear to be moving closer to the dissenting governors, Waller and Bowman, who both citied mounting weakness in the labor market as reasons to cut in July.

Consumer weakness mostly at the low end

Corporate earnings suggest that the US economy remains resilient, but there has been some evidence from consumer names that there are pockets of weakness, notably among lower-income US consumers who are adjusting their spending patterns. McDonald’s earnings came in higher than expected, but CEO Chris Kempczinski commented “Visits from lower-income consumers to fast-food restaurants continued to decline by double digits in Q2… They’re skipping a daypart like breakfast or trading down — either within our menu or to eating at home.”⁸

While some may see this as a canary in the coalmine for future growth, we’re a little more sanguine. The lowest income groups will be under greater pressure from tariffs, but from a broad economic perspective their contribution to overall spending is low. Middle- and upper-income households are more influential, and with equity values at or near record highs, net wealth in the economy is also sitting at a record high.⁹ Unless there are widespread layoffs, or a big equity market decline, we expect those groups will continue to spend and keep the economy ticking along.

Bank of England won’t be out done by the Fed

After the fun and games of the recent Federal Reserve meeting, where two members dissented for the first time in more than 30 years, it was the Bank of England’s (BoE) turn to surprise watchers. The BoE cut its policy rate by 25 basis points as expected, but only after a 4-4-1 vote that meant a second vote was needed — the first time in the panel’s 28-year history a second vote was required.¹⁰ Alan Taylor adjusted his vote from a 50 basis point suggestion to 25 basis points, breaking the tie. That left the committee in a 5-4 split that no economist had forecast in a Bloomberg poll.

We have previously considered Catherine Mann, who voted for a 50 basis point cut in March, and Deputy Governor Clare Lombardelli as more dovish members of the committee, but both voted to hold the base rate at 4.25% at this meeting.

The messaging from Governor Andrew Bailey in the post-meeting press conference confirmed the hawkish tone, but the spread of views across the committee shows how hard it is for central bankers to come to a consensus while both growth and inflationary risks are heightened. (Which illustrates that while some say it’s a near certainty that the Fed cuts in September. It is not a forgone conclusion.)

We also ultimately think the BoE has a few more cuts left in this cycle as the unemployment rate is steadily rising and many of today’s inflation pressures are not demand driven, but rather the result still of tax and utility bill increases. Assuming services inflation resumes its downward trend, that would give the doves more space to argue in coming meetings.

What to watch this week

Global Economic Data Releases and Events: August 12–16, 2025

Important information

Image: Douglas Rissing / Getty

All investing involves risk, including the risk of loss.

Past performance does not guarantee future results.

Investments cannot be made directly in an index.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The S&P 500® Index is an unmanaged index considered representative of the US stock market.

A total return index assumes that all cash distributions are reinvested.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 Index option prices. VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market’s expectation of 30-day volatility.

A basis point is one-hundredth of a percentage point.

Inflation is the rate at which the general price level for goods and services is increasing.

Interest rate volatility measures the extent to which interest rates change over time.

A policy rate is the rate used by central banks to implement or signal their monetary policy stance.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

The opinions referenced above are those of the author as of Aug. 8, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.