Post–Labor Day Market Watch: Fed Drama and Economic Signals | Sept. 2, 2025

Jim (: 01:36

Welcome to Optimal Insights. I'm your host, Jim Glennon, Vice President of Hedging and Trading Client Services at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode.

Welcome everybody. Welcome. is, it's Friday, August 29th. We're recording this ahead of the long weekend. don't expect a ton of news to come out over the weekend, but I suppose you never know.

Hopefully this is still super relevant. definitely should be. We're going to give a little preview on of the unemployment report that's due on Friday and also just some discussion around some of the Fed drama that's been happening. As I speak right now, Lisa Cook is court right now her firing from the Federal Reserve and there's just some general drama going on around that and a bit of a narrative that continues to build that.

that a year from now we may look back and see that the executive branch of the administration has control over the Fed. So we'll have some interesting discussion about that. before we get in there, just in the way of data, the OBMMI continues to drift lower. We touched six and a half, yay. 30 year fixed conventional is right at six and a half right now. 10 year is under four and a quarter. With some of this drama of volatility,

stuff going around with the Fed and probably a labor market that is struggling, it's good for rates. We hate to root for things like a recession or a poor job market, but it does tend to be good for interest rates. We'd love to see something in the six even a five handle, 599 would be I think an interesting way to get into the fall if we want to see a little bit of ⁓ a refi boom. Anyway, we're hoping, but also

closely watching the numbers and watching what's going on in the news. Volume hasn't picked up huge as a reaction to some of these lower may be a little seasonality coming into play there as well with just getting into the fall season and getting out of the traditional home buying season. So we'll talk about that too. So yeah, let's go check in with James, Jeff and Alex and see what's going on in the market.

Jim (: 03:52

All right, let's get into it fellas. We've got kind of a power hour thing going here. We won't talk for an hour, but we've got the right heads in the room, I think, for discussion about just, just wanted to check in what's going on in the markets right now. If you're, you you're probably listening to this on Tuesday or Wednesday after the holiday weekend, we got together on Friday just to, to discuss what are the big things to keep in mind as we approach, for instance, the

unemployment report that's coming out on Friday. And a lot of this, not renewed, but it's kind of the slow trickle of this barrage around the Federal Reserve. Recently it was the Lisa Cook issue with her being potentially fired and then suing back Pulte is calling mortgage fraud, which technically I think occupancy.

Issues can be considered fraud, but those of you in the mortgage industry know a little bit more about this. Anyway, just wanted to open up the conversation with all these things flying around. We were just talking and we just decided to hit the button and then start discussing this live. Maybe just start with what's happening this week. So we had PCE today, where'd that come in Alex? That was just below 3%.

Alex Hebner (: 05:03

Just below 3 % came in at 2.9, which was at expectations. Equity markets seem maybe a little bit spooked by that and some consumer sentiment that came out this off the highs, all time highs, of course. So really nothing to complain about there yet. yeah, I think 2.9 % inflation being on the Fed's preferred metric is what would have been six months ago, probably a headline but

At this point doesn't seem to be, it really hasn't captured the headlines all that much. It was really just, Hey, it's at expectations. And this is what the economists were expecting. you know, floating around 3 % inflation is, well above the pre COVID target and it's well above the two and a half percent kind of post COVID era. Target that the fed has shifted its focus towards. so I, I do fear, ⁓ and we'll get a better picture of this next week with the jobs report, but I do fear that.

there could be a stagflation scenario emerging here.

Jim (: 05:58

Yeah, that makes sense. And it is kind of funny, like you said, the 3 % is not spooking anyone right now, earlier on in the Fed's fight against inflation, this would have been seen as a setback. But then again, we have this paradox of with the tariffs all being in the double digits and kind of the conventional textbook wisdom being that tariffs are ultimately passed on to the consumer. would on paper expect inflation to be quite a bit higher by now because these

Tariffs have been in place for a very long time, but we're starting to see the profit margins at the producer level shrink, which is probably a good sign if there was any kind of excess there, but what's next, I guess, and that's what we will find out over this next, I don't know, 18 months.

Alex Hebner (: 06:43

Right. And this is likely that tariff inflation hit being priced in as we talked about over the past couple of podcasts. time to expect that companies are going to the price increases onto the end consumer just because of they finally have a clear picture of what tariff rates are going to be and they can tell they're going to be in place for the foreseeable future. in a lot of cases, you can kind of expect this to be a one time inflation hit. So think that is maybe the

idea that people are rolling with seeing this kind of take up a little bit here hoping you know we're going to see it take up but then it should it should moderate.

Jim (: 07:16

Yeah, I if you follow the money, seems to be going there. I mean, we're still hitting record highs on the equity markets. Seems like it is every You know, going back to Liberation Day, the market thought that this was going to be absolute beat down, these tariffs the market. now we're this slow trickle. It just, I don't know, somehow seems to be working mathematically.

Alex Hebner (: 07:16

⁓

Yeah, I mean, I definitely can see how equities would continue to appreciate. think it's smart to be in assets, you know, in an inflationary environment, smart to own things other than, you know, paper money. I think the market is really just shrugging this one off, especially, think kind of the number one thing I looked at, I jumped straight to the CME fed watch and saw, you know, is this impacting the chances of a rate cut in September? And if anything, it increased slightly overnight from yesterday's, count. So there's still.

Jim (: 07:47

cash. ⁓

Alex Hebner (: 08:04

fully expecting a rate cut in September.

Jim (: 08:07

Yeah, so the number wasn't three and a half or four, I guess that was the worry. So now we're seeing 90 plus percent that we're going to get a cut in September. And we have talked about how the Fed and even Powell's comments have capitulated at this point. They do seem to be more focused on the labor market and that's the number we're going to get next week. mean, expectations for that number, relatively low. We could get another revision. mean, the last number was in the

Alex Hebner (: 08:11

Yeah.

Yeah.

Jim (: 08:34

70,000 range so we could get a revision that's negative at this point. could add even more fuel to the rate cut fire, couldn't it?

Alex Hebner (: 08:41

Absolutely, yeah. Yeah, when you said that there's a chance for a negative revision next month, I think that's totally in the books. then yeah, the expectation for this month is 73,000. So expect well below 100,000 jobs on the month for sure.

Jeff (: 08:54

Just a little set on employment numbers. Just want to reiterate again, I think we need to decrease our expectations again because of immigration, like the new normal, right? The raw account, decrease those expectations, continue to look at probably employment rate is just as important as the actual jobs added.

Jim (: 09:15

Yeah, I mean, just as a reminder to everybody, right? The unemployment rate is continuing to stay low. Like we're at 4.2 % until you get over five and a half, not.

something to be super concerned about historically, but the fact that the economy is not needed to add jobs to keep that number low is likely a symptom of just kind of a trade-off between new folks coming into the job market, American-born people taking some of the jobs, potentially trading off with some of the jobs of non-US born workers who may have been caught up in some of the mass deportations or just there is not immigration right now coming across the border or I think as we said before that

Some folks are afraid to go to work with some of the raids and those kinds of things going on. So it's just a transformation and a fairly quick one of the labor market.

Alex, you had some thoughts too just on like what number should we be looking at, right? 4.2, that's the headline number that is always quoted, but there's other levels of BLS percentages of statistics are changing quite a bit differently than that stagnant number.

Alex Hebner (: 10:16

Yeah, there's a full six, I believe, unemployment rates that they publish. The U3 is kind of the most oftenly which is pretty much everyone that is currently employed and then those that are actively looking for a job and have been looking for, I believe it's less how many weeks is it? Maybe eight weeks? Maybe a financial quarter or so. Those that are actively trying to find really since the Great Recession, this is a much longer term.

Jim (: 10:35

We'll go with that. I believe it.

Alex Hebner (: 10:43

trend but seen the other unemployment rates which includes a lot of more marginally attached people, people that you know they were previously in that U3 unemployment category but they've just gotten so many rejections or they've found some employment or some other means of providing for themselves so they've fallen out of what the BLS counts like the U6 unemployment this includes a lot of these marginally attached people or people who are they're working part-time but they prefer full-time employment.

that's been trending up since: 2023

Jim (: 11:28

Right? So, I mean, all of this kind of points to the narrative being accurate that the employment picture is probably quite a bit more bleak than one would think just reading the headline numbers and that some of this trade-off in jobs in the short term could be seen as a good thing, but in general, the economy is not turning out new positions like it was a year ago, two years ago, three years ago, which could be a bad sign in terms of growth and just dynamism of our economy in general.

Alex Hebner (: 11:58

Absolutely, that appears to be the trend. I mean, just look at any major news outlet and what they've been publishing recently.

James Cahill (: 12:04

And Alex, as you said near the top here, that like that does imply a stagflationary environment, right? If we're having higher inflation creeping up even if it's, you know, kind of steady where it is, it's higher than where we want it. It's not a great here. I think it kind of pulls us back over towards the Fed and everything that's been happening there. So as we all know, but

Jim (: 12:04

Yeah.

James Cahill (: 12:31

time you listen to this, know, we'll have a week left, 10 days until that first Fed whatever will happen with Lisa Cook, we record this today, she's in court right now it And I've been kind of laughed about this, but her mortgage fraud, is signing two locations as a primary resident. I think that there's probably an LO listening to this right now thinking, oh, you're not allowed to do that.

⁓ So it might be a little small. She might squeak through, but as Trump applies more pressure, there will be others on the Fed who are going to receive this type of pressure. They want to get interest rates lower, whether it's to get bonds in the right place to deal with the debt ceiling, it's try and keep the economy steaming ahead, get more jobs. It's hard to say.

exactly what the goal is, but generally lower rates is better. And maybe the administration has just clawed onto that and is going, okay, well, lower is better. Let's get it at any cost.

Jim (: 13:25

Mm-hmm.

better affordability for homes, all of that, right? Like lower rates is what the administration has wanted since the beginning. And yeah, maybe at any cost, that's what gets done. Even if the cost is higher inflation, which we've kind of been warned could be some temporary pain. Can it cure everything if rates go lower? And there's certainly a building narrative out there that a year from now, for instance, we will probably see a Fed

James Cahill (: 13:35

lower rates is what the administration has wanted.

we will probably see a Fed

that is no longer fully autonomous. Is that priced into the market?

Jim (: 14:00

that is no longer fully autonomous. Like is that priced into the market? Like what

does that really look like? How bad does the inflation get if we go with a totally different philosophy that lower rates are more important than higher prices?

James Cahill (: 14:14

I would say it's almost inarguable that the Fed won't be controlled by Trump. He has two board members that he's already elected. There's space for him to get two more on. That would be four out of seven. If they fall along with what he wants, that's a win on every single FOMAC meeting. He could exactly it as long as they went along with what he wanted. we're not necessarily seeing that right now. There's a couple of dissenters this month who...

said earlier, maybe 15, now we're going back to 25. But it's hard to see, you know, a year out that there wouldn't be four, if not five, FOMAC members who were directly picked by Donald Trump.

Jim (: 14:55

Yeah, those dissenters are probably next on the chopping block. It's weird to think about because it has been, I believe it was back in the 50s that the Fed kind of was moved into this paradigm they're in now, which is full autonomy and independence from the executive branch of the government, but it does seem to getting pulled back in. I've seen it likened to boiling a frog.

If you're all familiar with that term, it's just kind of happening slowly so that there's no sudden moves that disrupt the market. So you think back to Liberation Day, for instance, in terms of the tariffs. That was the big day where market tanked and thought this was going to be the worst thing to happen. And then since then, we've slowly implemented tariffs, made deals with other countries, with trading partners, and the market has thrived. And then you go back to when

first started attacking the White House in general, first started attacking Powell. There was a sell-off in bonds, rates went up, there was some worry that there would be a flight from treasuries and that ended up not happening. And now there's just been this slow burn of attacking Powell, attacking the renovation of the headquarters now, Lisa Cook is on the stand and so on. It'll probably continue for the next six, eight, 12 months until there's a stacked.

deck, right? And we House sympathetic folks that are voting on the FOMC and it only takes seven out of 12, right? It may not, especially if you fire several of them, it will not take long to take complete control of the Fed.

Alex Hebner (: 16:33

And all else the same, think one of you guys pointed out this morning that this would effectively give these Trump appointees control of the Fed until 2042, I believe one of you guys said. So yeah, this is quite long term. And then as I pointed out, I don't see this being something everyone's gonna back down from, rather the other side's gonna back down from. And I definitely see a, not that I see the Democrats being able to win an election on, we're gonna raise rates to

James Cahill (: 16:43

Yeah.

Jim (: 16:44

I didn't see that, yeah.

Alex Hebner (: 17:01

tame inflation, everyone's in pain right now, but I see like a stack the court kind of issue becoming apparent because if they can't remove Trump's appointees, well, they'll just say, okay, well now the FOMAC council is going to be 24 members and we're just going to throw in 12 new So I could see that emerging as well, but who's going to want to deviate from record low rates?

James Cahill (: 17:21

as we know, if they start chopping these rates down, right, it's good for us. should in theory be more, you know, lower rates, more ability to get a house. But if that drives inflation, then there's housing appreciation. And if wages stay stagnant, then now your first time home buyers, even with a lower rate are looking at a more expensive property with less buying power than they had previously. So this isn't actually a ⁓

panacea here, getting lower rates is going to help our industry. That's not necessarily correct if inflation does come.

Jim (: 17:54

Good point. Yeah, if wages don't chase it, then inflating your way out of a situation doesn't work, right? Otherwise, maybe it does, at least it's one school of thought that could get you there. It could make the debt load on the government and everybody really, debt dollars become easier to pay rates are low and wages go up. But yeah, if wages don't increase, this whole plan does not work.

We just see higher prices, you know.

James Cahill (: 18:22

It's

a perfect Labor Day theme right there, Jim. That ties in.

Jim (: 18:24

Yeah.

Alex Hebner (: 18:26

You

Jim (: 18:28

I hadn't even thought it that far through, but you're absolutely right. There's some tie-ins to the history of Labor Day there.

All right. What else on these subjects?

Alex Hebner (: 18:40

Kind of it's going to probably fly under the radar, but Marin, who's Kugler's replacement, he's going before the Senate Banking Committee next week on Thursday. I expect him to you know, waved through, see maybe some testy comments or, you know, lines of questioning out of that. And hey, if there is maybe somehow some sort of blocking there, that could add a whole new narrative to everything we've been talking about but I don't really see the legislative standing up.

at this juncture, in all honesty.

Jim (: 19:07

Right. I mean, that's what it would take was, I don't know, a gang of hawks to come in and kind of push back against what is obviously happening, which is to bring doves into the Federal Reserve.

Alex Hebner (: 19:19

Exactly.

Jim (: 19:19

more on this next week, but otherwise, yeah, keep an eye on the Fed drama right now and obviously watch the unemployment report on Friday because that has the potential to be a big market mover, especially if we get a revision to the downside for the already low number we saw in early August. if that number ends up going negative, meaning that we're subtracting jobs from the economy and remembering that we have, you

We're definitely adding jobs in healthcare, still adding jobs in hospitality and construction, but the rest of the economy is likely subtracting. And to have a net negative number would mean that that kind of rally of hospitality and hospitals, keeping the numbers up is over and we're in a contraction mode, which is, I think, dangerous for a lot of the narratives going on. But again, it's good for rates, it's good for mortgages.

Jim (: 20:08

Okay, let's wrap this thing up. Big thanks to James, Jeff, Alex. Super fun conversation today, a lot to think about. Don't forget to watch the employment report coming out on Friday and just keep your ear to the ground in terms of the discussions about the Fed and Lisa Cook and the whole drama surrounding some of the changes that are going to be likely happening in the Fed here over the next few months. That's it for today.

Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.