Pantheon: Powell's big shift signals jobs risk; Fed seen cutting rates three times in 2025

Pantheon Macroeconomics highlights a significant shift in Fed Chair Powell's recent remarks, signaling heightened concern over labor market weakness and a rebalancing of inflation risks. Citing a sharp deceleration in payroll growth to a three-month average of 35k, Pantheon forecasts unemployment to exceed the Fed's 4.5% year-end target, reaching 4.75% by late 2025. This revised outlook leads Pantheon to project the Fed will implement three 25bp rate cuts in September, November, and December, a more aggressive easing path than currently priced by markets, as softening labor limits wage-driven inflation despite tariff concerns.

Analysis

Pantheon Macroeconomics identifies a significant dovish shift in Federal Reserve Chair Powell's recent commentary, marking a departure from the inflation-focused stance noted in the July Fed minutes. The primary catalyst for this pivot is the marked deterioration in the labor market, evidenced by a collapse in three-month average payroll growth to just 35,000 from 168,000 earlier in 2024. Powell now frames the outlook as a rebalancing of risks, suggesting concerns over employment are gaining precedence. While acknowledging tariffs as an inflationary pressure, the Fed believes a softening labor market will suppress wage bargaining power, thereby containing the risk of entrenched inflation. Based on this, Pantheon projects that unemployment will surpass the Fed's 4.5% year-end forecast to reach approximately 4.75% by late 2025. This leads Pantheon to a more aggressive monetary easing forecast than is currently priced by the market: three 25-basis-point rate cuts in September, November, and December.

Key Decisions for Investors

• Given Pantheon's forecast for three rate cuts in 2025 exceeds current market pricing, investors should evaluate increasing duration in fixed-income portfolios to capitalize on potential further declines in bond yields.
• The Fed's dovish pivot could serve as a near-term tailwind for equities, but positions should be monitored closely against incoming labor market data, as a sharper-than-forecast deterioration presents a key risk to the economic outlook.
• The discrepancy between Pantheon's rate-cut forecast and market expectations suggests investors should monitor interest rate derivatives for potential repricing events that could offer tactical trading opportunities.
• Investors should pay close attention to upcoming jobs reports, as any data confirming the sharp deceleration in hiring would validate Pantheon's thesis and likely accelerate market pricing for a more aggressive easing cycle.