Afford Anything - First Friday: Jerome Powell's Remarks at Jackson Hole

Episode Date: September 5, 2025

#640: The jobs report came out this morning and it was a painful one. The US added only 22,000 new jobs in August, according to the latest BLS report. And unemployment ticked up to 4.3%. What does this mean? Find out in today's First Friday episode! Timestamps: Note: Timestamps will vary on individual listening devices based on dynamic advertising run times. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (01:48) ADP vs BLS Jobs Data (04:33) Mortgage Rates & Their Impact on Homebuyers and Sellers (11:30) Fed Chair Jerome Powell’s Remarks (12:54) The Fed’s Dual Mandate Explained (15:58) The Fed’s Changing Approach to Unemployment (18:13) Implications: Rate Cuts on the Table For more information, visit the show notes at https://affordanything.com/episode640 Learn more about your ad choices. Visit podcastchoices.com/adchoices

The jobs report came out this morning, and it was a painful one. The U.S. added only 22,000 new jobs in August, according to the latest BLS report. And unemployment ticked up to 4.3%. What does this mean? While we already knew with over 90% certainty that the Fed was going to lower interest rates at their meeting later this month, September 17 to 18, we now, even though we already knew that was going to happen, we now have a much stronger case for it. In fact, I think the question can be asked, are they going to lower interest? Interest rates only by 25 basis points, a quarter of a percentage point, or will they lower it by half a percentage point? I think there could be a case made for that. So we're going to discuss all of that in today's first Friday, monthly economic update. Welcome to the Afford Anything Podcast, the show that knows you can afford anything, not everything. The show covers five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-eye fire. Typically, every Tuesday, we answer listeners submitted questions, and every Friday we interview a guest. But there's one exception, and that is the first Friday of every month,

in which on the first Friday, which is the same day that the jobs report comes out, we dedicate an episode to a macroeconomic look at what's happening in the economy. So welcome to the September 2025 first Friday episode. Okay, so no one was really expecting the jobs report to be this bad. I mean, we know that the May and June jobs report numbers were revised downwards to 14,000. and 19,000 respectively. We also know, of course, that the former head of the BLS lost her job as a result of such dramatic downward revisions.

In spite of those two elements, we did have positive news that came from the ADP report. As a reminder, ADP is a private payroll processing company. Every month, in advance of the BLS numbers, ADP releases their own report that uses actual payroll data from approximately 460,000 companies.

which represent 26 million private sector employees. Now, the ADP report is not a comprehensive jobs report because it only has private sector information, but it does provide a bit of a barometer, a bit of a hint as to what we might expect. It's generally considered to be a very reliable early indicator of what the Bureau of Labor Statistics, which is the official government jobs report,

what the BLS report might show. The ADP report showed that private sector employment grew by 54,000 jobs in August. So the ADP report was a lot more glowing, a lot more optimistic than the official BLS report. That's why the BLS report that came out this morning was such a shock. And the effect that it had on markets is that investors flew into bonds. So basically, this is how it works. We get a bad jobs report. That means that we know with even greater certainty, we can guess with even greater certainty that the Fed is going to drop interest rates. If we know that the Fed is going to drop interest rates, we buy bonds because we want to lock in today's rates before they get even lower.

And so when a bunch of people buy bonds, that makes bond prices rise because the demand for bonds is high, which means that bond yields go down. And so the fact that treasury yields are dropping is a sign that there's a good chance that mortgage interest rates might decline, which is very good news for anybody who wants to buy a home. And also for anybody who wants to sell a home, because we need more buyers in the market. right now. There's low transaction volume. Homes that are for sale are spending on average 28 days, average days on market, which is significantly increased from 24 days, which it was last year. And from, I mean, during the pandemic in certain locations, it went as low as eight days.

So homes that are for sale are sitting on the market longer. There are fewer buyers that are interested. Sellers are getting fewer offers. And so we need mortgage interest rates to decline in order to spur the housing market. And the fact that treasury yields are dropping is very good news in terms of taking a step in that direction. Technically, when the Fed lowers interest rates, they don't directly impact mortgage rates. When the Fed lowers interest rates, they are lowering the rate, the overnight interbank lending rate, the rate at which banks loan money to and from one another. But when the Fed lowers interest rates, oftentimes treasury yields also drop. And that's what we're seeing right now. Treasury yields are dropping. And mortgage rates are primarily tied to the 10-year

treasury yield because most mortgages are 30-year loans, but the average homeowner refinances or sells within 7 to 10 years. And so lenders look at the 10-year treasury as a proxy for how long a borrower is going to actually hold that mortgage before it gets paid off. So the 10-year Treasury becomes this risk-free baseline rate. That's the amount the U.S. government will pay in order to borrow money for 10 years, right? So if you think of the 10-year Treasury as that risk-free baseline rate, you take that rate, you add a spread on top of it, and boom, that's your 30-year mortgage rate. And as of this morning, the national average 30-year fixed mortgage rate is between 6.5 to 6.6% according to bank rate and nerd wallet. And for a refinance at 6.7%.

What implications does that have? Well, let's math this out. A $300,000 mortgage at a 6.7% interest rate, which is right as of this morning, the prevailing 30-year refi rate, a $300,000 mortgage at a 6.7% interest rate means that the principal and interest portion of your mortgage payment is, one $1,947 per month. Take that same $300,000 mortgage and refi it at a 6% interest rate. That means your P&I portion of your mortgage payment is $1,799 per month. So you get a 7.6% discount, a discount of $147 a month, from a 0.7 percentage point reduction. I know I'm throwing a lot of numbers at you in audio form, but that's basically a mathed-out way of saying that dropping interest rates by a little less than three-quarters of a percentage point leads to a discount for you of

7.5% in this particular example. In other words, even small tweaks in the mortgage interest rate lead to very steep discounts in what you pay out of pocket for the cost of a mortgage. And reason that matters is because according to the National Association of Realtors, if the average 30-year mortgage interest rate drops below 6%, then 5.5 million more households would qualify for mortgages. And the National Association of Realtors predicts that this would lead to a 3% boost in home sales in 2025 and a 14% boost in home sales in 2026, meaning it would revive the slump in home sales that we're seeing right now. Oh, and by the way, I have some more stats on that. So inventory, I mentioned housing inventory is sitting on the market for a lot longer.

Inventory is up 16 percent as compared to a year ago. So housing inventory is currently at 1.55 million units. And because of this increased inventory and because of higher days on market, there are sellers who are starting to discount their homes. So we've seen price drops in 33 out of the 50 largest metro areas. That's as of July 2025. So what this means is that if you're a buyer, this is a fantastic time to go buy. It's a buyer's market. This is the amazing time to buy a home. You're not going to face a lot of competition. You might be the only person making an offer on a home after that home has languished on the market for weeks. So wonderful, wonderful, wonderful time to go out and buy a home.

Terrible time to sell one. So that's an update on the latest jobs report on Unnernerable on what the Fed is likely to do, on what treasury yields are doing, on how that affects mortgage interest rates, and on why this all matters, and particularly if you're buying or selling a home, how this affects you. We're going to take a break to hear from the sponsors who make the show possible. When we come back, I want to talk about Fed Chair Jerome Powell's remarks in Jackson Hole, Wyoming. He made his last major public remarks as Fed Chair in Jackson Hole a couple weeks ago. And so we're going to talk about what he said and what it all means. We're going to discuss that after these words from our sponsors.

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Let's turn our attention to Friday, August 22nd, when Jerome Powell delivered remarks at Jackson Hole, Wyoming. He spoke at an annual conference of central bankers and economists, and this is his last major speech as the chair of the Fed. His term will come to an end in May, 26, May of next year, although he has a separate concurrent term as a Fed governor, and that's going to go until January of 2020. So he'll still be a Fed governor. He just won't be the chair of the Fed. In any event, his remarks signaled that the Fed is shifting strategies. So in 2020, the Fed announced a strategy.

in which they said that they would tolerate periods of higher inflation as long as the job market looked healthy. To state that a little bit more plainly, the Fed has two jobs called a dual mandate. One of their jobs is to aim for what they call quote unquote maximum employment. And while they don't have a precise numerical target unemployment rate, a lot of Fed officials will estimate that that unemployment rate should be somewhere around 4.2 percent which is about where we are right now. Some people will say even up to 5%. Because that level of unemployment represents a level where everyone who wants a job can find one, but it can't be

zero because some level of unemployment is a normal part of a dynamic economy. So one of the Fed's jobs is to shoot for that maximum employment, which many people think is represented by an unemployment rate of around somewhere between 4.2% to 5%. that's one of their two jobs. The other job that they hold is to keep inflation down to a target 2% rate. And by tightening or loosening monetary policy, they play with these levers that affect both. The more capital flows into the economy, the more businesses can borrow money and create jobs, but also the more inflation grows.

And vice versa, the higher they raise interest rates, the less capital there is for businesses to grow. But that's also how you tamped down. on inflation. In 2020, the Fed announced that they were going to shift their strategy, and they were going to tolerate periods of higher inflation in order to compensate for the fact that there were previously periods of time where inflation actually ran below their 2% target. So prior to 2020, the Fed actually struggled to get inflation up to its 2% target, even during times of historically low unemployment. And they viewed this as the economy pulling back prematurely

and therefore curtailing economic opportunities. And so in 2020, they announced the strategy change that was called flexible average inflation targeting. What they stated was that they would temporarily allow inflation to run moderately above 2% following periods where inflation had been persistently below their target as sort of a makeup strategy, you know? You're a little below the target, then you're a little above the target.

So, you know, it balances, it net-nets out. So by virtue of letting inflation run a little bit high, letting it get a little hot, they could make up for periods where inflation was too cool. And they were hoping that that would have the effect of giving the Fed some more wiggle room during downturns without raising interest rates too much. Now, the other thing that they did in 2020 was they also shifted their approach to their goal of maximum employment. So in the past, the Fed used to respond to what they called deviations from full employment, which meant unemployment could be too low.

They didn't want unemployment to be too high, obviously, but they also didn't want unemployment to be too low. That was how they had handled their mandate of full maximum employment in the past. But in 2020, they did a strategy shift. The new policy focused on shortfalls from maximum employment. They decided that they, would not rush to raise interest rates just because unemployment was low. One of them compared it to, quote, taking the punch bowl away just as the party is getting good. So they shifted their policy

and said, hey, you know what, just because unemployment's low, we're not going to raise interest rates. Instead, we need to see clear evidence that inflation is rising in a sustainable way before we raise interest rates. So that was the other policy shift that they made in 2020. All right. Now, why am I talking about 2020 so much, it's because the remarks that Jerome Powell made reversed much of the 2020 stance. Because as we know, in hindsight, the Fed made those strategy shifts at what in hindsight ended up being exactly the wrong time. Because they were, I think, as history has shown too slow in raising interest rates, we all remember in 2021, Jerome Powell famously referred to inflation as transitory. And in late 2021, that's when we began having this massive inflation spike, the worst

inflation in 40 years. And so by this year, by 2025, Fed officials admitted that the makeup strategy had proven, quote, irrelevant in the face of these major supply shocks and major demand shocks. And so Jerome Powell's remarks in Jackson Hole on Friday, August 22nd, effectively reversed those 2020 strategy changes and shifted the Fed back towards their 2019 policies, shifted the Fed back towards the more traditional approach of focusing first and foremost on price stability. Those were two of the major takeaways, the reversal of flexible inflation averaging and the reversal of the bias towards low unemployment. those are two big strategic changes, two big strategic takeaways that we got from Powell's remarks in Jackson Hole. But the other more imminent, more pressing thing, and this is what the headlines really focused on,

is that Powell's remarks also indicated that there's a very high likelihood that the Fed is about to start cutting interest rates. In fact, the probability of a rate cut after Powell made his remarks on August 22nd, that probability jumped to 91%. Previously, it was 75%. So after Powell's remarks, the market started pricing in near certainty that the Fed's going to lower interest rates at their September meeting. Most people, at least right now, are anticipating a quarter percentage point cut, 25 basis points. There's a possibility that they might go a little steeper and give a half point cut. Right now, the markets are pricing in a slim chance of that. So there's a There is a chance, but overwhelmingly the markets are pricing in at least a quarter point cut. The Fed meets again on September 16 and 17. So mark your calendars for the afternoon of September 17 because that is likely when at least a quarter point cut. And personally, I'm hoping for a half point, but at least a quarter point cut is going to be announced. That's our show for today.

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Thanks again for being part of the Afford Anything community. I'm Paula Pant, and I will meet you in the next episode.