Professor Siegel Weekly Commentary
Powell Pivot Clears Path for Rate Cuts
August 25, 2025

Senior Economist to WisdomTree and Emeritus Professor of Finance at The Wharton School of the University of Pennsylvania
Chair Powell’s speech at Jackson Hole was a proper and long overdue pivot—and the markets immediately rejoiced. This was the dovish signal investors had been hoping for, and even stronger than I expected Powell to deliver. The Fed’s newfound willingness to “look through” tariff-induced inflation marks a major shift in policy tone, and I believe we are now firmly on a path toward easing, barring any major surprises. That’s excellent news for equities, housing, and rate-sensitive sectors.
It’s remarkable how openly Powell downplayed tariff inflation. After months of ambiguity, he finally acknowledged that these price increases are one-time tax and exogenous—just as I’ve argued for months. This matters because if the Fed is no longer chasing inflation driven by non-monetary forces, the focus naturally shifts to the labor market. And here, the evidence is mounting that the momentum is fading.
Goldman Sachs pegs underlying monthly payroll growth at just 33,000 jobs—a level so low that even a mild statistical wobble could deliver a negative print. If that occurs in the August jobs report, I wouldn’t be surprised to see a 50-basis point cut in September. Otherwise, I expect the Fed to move methodically: 25 basis points at each meeting through year-end, targeting a fed funds rate near 3% by early next year.
Markets have rightly priced in this trajectory. While the 10-Year Treasury yield fell modestly on Powell’s remarks, it’s the mortgage market where the implications are potentially most powerful. With prepayment risks high and spreads wide, 30-year mortgage rates could drop by 100 basis points even without major movement in long yields. That explains the sharp rally in homebuilders. Adjustable-rate borrowers stand to benefit directly from the short end of the curve falling, and that feeds directly into the strength of small-cap stocks, many of which are highly sensitive to short-term borrowing costs.
Make no mistake, these rate cuts matter. Some question whether shaving 75 or 100 basis points makes a real difference. It does—$20 trillion in loans are directly pegged to the fed funds rate through SOFR, LIBOR, and prime-linked products. That includes everything from credit cards to small business loans, and it’s why the Russell 2000 outperformed strongly. Big tech might not need to borrow, but mom-and-pop America sure does.
Of course, the Fed’s long-term framework also deserves scrutiny. Powell’s speech effectively junked the 2020 “average inflation targeting” regime, which was poorly designed and quickly rendered obsolete by the realities of the post-pandemic economy. He’s returning to a more traditional, pre-pandemic model, which is a welcome shift. But he still avoided the bigger question—why are we still in an administered-rate regime, rather than a market-driven one? The Fed’s balance sheet remains bloated, and until we return to a scarce-reserves regime, rate policy will continue to be an exercise in central planning.
Politically, the situation around Fed Governor Lisa Cook adds noise but little substance. Her potential ouster, or replacement, won’t materially alter policy, especially now that Powell has signaled his intent. Trump’s influence may loom large in public discourse, but operationally, the Fed has already turned the corner. The more important question is whether Powell will cut fast enough to satisfy political demands. A negative jobs print could accelerate the pace.
So, what does all this mean for investors? Equities are in a strong position, especially considering the rally during a seasonally typically weak period. Markets are brushing that off and pressing toward new highs. I still see 5–10% upside from here, particularly if earnings hold up, which they have so far. The beat rate in Q2 was among the best we've seen in years, and Q3 guidance looks strong. The wealth effect from rising equities and crypto is supporting high-end consumer demand, and while lower-income consumers may start to feel the bite of tariffs, we haven’t seen a meaningful pullback in spending yet.
On sector positioning, I favor small-cap and value stocks here, especially those with strong dividend yields. Rate-sensitive income plays become more attractive in a lower yield environment. Multinationals also benefit from the dollar’s weakness, boosting foreign earnings translation.
Big picture though, unless we see a sharp labor market reversal or a major geopolitical shock, I believe this rally still has legs.
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