Don’t be surprised today when Jerome Powell reiterates that we are data-driven. That is not what the White House wants to hear.
The Federal Reserve has expressed uncertainty about the potential inflationary effects of new tariffs, emphasizing its commitment to a data-driven approach. However, the data the Fed relies on largely reflects past conditions — a view through the rearview mirror. To avoid repeating past mistakes, the Fed must remain forward-looking. If it fails to act preemptively, the following scenario becomes increasingly likely.
If the Federal Reserve delays cutting rates, it risks repeating its 2020 mistake—this time by allowing a slowdown to harden into recession.
Fed Data Spotlight a Slowdown — Cut Rates 50 bps in Sept. 2025
Recent U.S. data show growth stalling. Real GDP contracted at a 0.3% annual rate in Q1 2025, versus +2.4% in Q4. (See chart below.) The Fed risks waiting on these “backward-looking” indicators before acting—a recipe for recession. Personal consumption spending decelerated, imports jumped, and government outlays fell, driving the Q1 drag. Meanwhile, inflation remains above 2% (PCE prices +3.6% y/y). In short, major sectors are cooling under high rates and uncertainty, and the Fed should preemptively ease policy.
Figure: U.S. real GDP growth (seasonally adjusted annual rate). After four strong quarters of 2024, GDP turned negative in Q1 2025. Fed officials pride themselves on being “data-driven,” but official data arrive with a lag. The April Fed Beige Book and recent surveys already report softening activity: two‐thirds of Fed districts say manufacturing is flat or declining, and consumer spending (aside from autos) is down. Anecdotally, trade and transit firms see rising costs and weaker orders, and many businesses are delaying investment amid tariff uncertainty. In manufacturing and construction, payrolls are flat; job growth has been almost entirely in healthcare, warehousing, and finance. Housing activity is tepid: new home sales and permits are essentially unchanged year-over-year, and credit-sensitive housing starts plunged in March.
Labor Market: Surface Strength, Underlying Weakness
Headline payrolls (+177K in April) and a 4.2% unemployment rate appear solid, but the details tell another story. Employment gains are narrowing and narrowly concentrated. Health care (+51K), warehousing (+10K), and couriers (+8K) drove the April jobs increase, while historically cyclical sectors—manufacturing, construction, retail trade, leisure, and hospitality—saw “little or no change.” In the Fed’s Beige Book, many districts report that firms are pulling back hiring until economic risks clear, with notable layoffs in government-funded roles. Wage growth is slowing (average hourly earnings +3.8% y/y in April), and labor force participation is stable, not rising. In sum, the labor market is firming to an equilibrium, not accelerating.
Manufacturing, Housing, and Credit: Signs of Strain
Manufacturing is already contracting. The advanced GDP report notes that imports surged (reflecting weak domestic demand) and factory activity contributed little to growth. The Fed’s Beige Book confirms that nearly all districts saw manufacturing flat or down. Surveys show business investment plans cooling under uncertainty. Housing is similarly soft: building permits in March were 0.2% below year-ago, and housing starts fell 11.4% from February, led by a sharp decline in single-family starts. Homebuilder sentiment is fragile, and inventories are slim, implying future downside risk. Even lending activity is tightening. Banks report a loose loan demand but also have raised lending standards, squeezing credit for smaller businesses.
Consumer Spending and Prices: Stuck in Neutral
Consumer spending is weakening under the dual weight of still-elevated prices and uncertainty. Real PCE growth slowed in early 2025, and the Fed’s retail contacts say non-auto sales are “lower overall.” Core inflation has eased (CPI up 2.4% y/y in March), but price pressures in services and housing rents persist. Higher interest rates and prospective tax burdens are pressuring households. For example, wages rising less rapidly than inflation erodes buying power: average wages are growing 3–4%, while consumer inflation (ex-shelter) is near 3%. Auto sales and travel bookings surged on stockpiling ahead of tariff increases, masking weakening demand in many sectors.
Risk of Policy Overshoot: Don’t Repeat 2020’s Mistake
The Fed has kept rates high to cool inflation, but policymakers risk overshooting and tipping the economy into recession. The mistake in 2020 was arguably moving too late (and then easing too much only after a sharp downturn), which contributed to the historic 2021–22 inflation surge. Today, as growth falters, waiting for unambiguous data will delay relief—by the time Q2 GDP or May payrolls clearly show a slowdown, economic momentum may be gone. Financial conditions have already tightened (higher yields and spreads), and further strain could rattle markets. Inaction risks a harsher slowdown down the road, forcing larger rate cuts in an emergency.
Why a 50 bp Cut in September
A preemptive 50 bps cut in September 2025 would restore policy credibility and smooth the downturn. It could “stabilize financial conditions” by lowering short-term rates and sending a dovish signal to markets. That relief would flow through reduced borrowing costs for households and businesses, cushioning consumer and business spending. It would also preserve the still-strong parts of the labor market: fewer job losses in commerce and construction. A mid-September move before the FOMC meeting (or at it) would pull forward support into the late-summer slowdown. Waiting past fall risks a self-fulfilling recession and a steeper, less controlled recovery.
Investor Outlook: What to Watch
- Federal Reserve communication. Watch for any shift in tone from Fed officials over the summer. Talks of “data dependence” imply cuts won’t happen until mid-Q3; any hint of urgency in speeches could presage action.
- Inflation data. The CPI and PCE indexes for April–June will be critical. If core inflation moves decisively below 2.5%, pressure builds for rate relief. A resurgence in prices, however, could delay cuts.
- Labor reports. Payrolls and unemployment each month will show if the soft trend continues. Of particular concern: continued flat hiring in construction, manufacturing, and leisure. A rising unemployment rate would force policy pivots.
- Retail sales & spending. Retail sales (Census) and consumer confidence surveys will signal whether households pull back. Look for soft auto sales (post-tariff) and signs of restraint in services.
- Housing and capex. Upcoming housing starts and permits will show if the March drop was a blip or the beginning of a trend. Similarly, business surveys (ISM, NFIB) will reveal if investment plans are stalled.
- Markets. Watch the 10-year Treasury yield and mortgage rates. A flattening or inversion of the yield curve, or a jump in corporate spreads, would confirm tightening credit. Equity market moves (especially in tech, industrials, and consumer stocks) will reflect risk appetite under different scenarios.
Summary TLDR:
Watch the Jerome Powell statement CLOSELY. For investors, the likely scenario is that by late summer, the data landscape justifies a Fed pivot. A timely 50 bp cut would likely be welcomed by markets, supporting risk assets and moderating the dollar. In contrast, further signs of tightening conditions or surging spreads could herald a tougher road ahead, favoring defensive positioning. Bottom line: incoming data is soft; with the U.S. economy at a crossroads, investors should position for slowing growth and watch Fed communications closely every month. A signal that he is ready to lower rates would be a welcome gift to the stock market. Don’t forget down the road… I told you so.