Labor Market Weakness Triggers Fed Division: What It Means for Investors
Posted on August 13, 2025
The Federal Reserve, in its July 30 meeting, opted to keep interest rates unchanged at 4.25% to 4.50%, marking the fifth consecutive meeting with no change to the policy rate. Fed Chair Jerome Powell has maintained a consistent message, reiterating the Fed’s data dependent approach and its dual mandate focus on bringing down inflation to its 2% target while supporting full employment.
Notably, the decision to keep interest rates steady passed with a 9-2 vote—the first time in over 30 years that two Fed governors dissented. Christopher Waller and Michelle Bowman voted to lower the policy rate by 0.25%, voicing concerns over signs of a weakening labor market, which outweighs the specter of an inflationary tariff-passthrough. Governor Waller was particularly prescient in his expectation of the “soft landing” economic scenario that came to pass in 2023, so his concerns merit attention. We too have highlighted the increasing risk in the labor market in our latest investment webinar series posted on July 15th.
July’s Consumer Price Index (CPI) report, which was largely in-line with expectations, has in the market’s view, given the Fed the green light for a September rate cut – a scenario now with over a 90% probability attached to it. The remaining data hurdles before the September 17 meeting are the August CPI report, a PCE (Personal Consumption Expenditures) price index—which is another inflation gauge, and the August labor report.
Perhaps in expectation of a renewed rate-cutting regime, strong investor demand for current yield has pushed investment-grade and high-yield bond credit spreads to near their historically tight levels. This mimics the similarly stretched valuations we’re finding in the equity space. Thus far in 2025, this demand has translated into solid performance: the year-to-date total return for high-yield bonds has been 5.04%, while investment-grade bonds have returned 4.24%.
Amid the mixed macro backdrop, we believe that fixed income continues to offer compelling value, with current yields at 5.04% for investment grade and 7.08% for high yield. While the near-term path for interest rates is still unclear, we remain confident in the role fixed income securities can play in generating income and dampening volatility in your portfolio.
For additional information, please see our most recent webinar on this asset class, here.
Miles Toth
Vice President, Portfolio Manager
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