Arrival of the Doves

MONETARY

• New York Fed President John Williams indicates that a gradual lowering in short-term borrowing costs is likely to happen over time if the economy meets his current forecast of modest gains in unemployment and a softening of inflation trends next year¹
  • President Williams noted that rates are now at “modestly restrictive” levels that are “appropriate” given the state of the economy¹
    • (Williams) “if progress on our dual-mandate goals continues as in my baseline forecast, I anticipate it will become appropriate to move interest rates toward a more neutral stance over time,”¹
  • Williams forecasts GDP growth at between 1.25% and 1.50% this year, with the unemployment rate, rising to 4.5% next year. Regarding the labor market, “it’s clearly the case” that risks around the jobs outlook have increased¹
  • (Williams) “Fortunately, I am not seeing signs of amplification or second-round effects of tariffs on broader inflation trends,” “we’re not seeing outsized effects in tariffs” (on inflation), “on the margin” the upside risks to inflation from the tariffs have been reduced from where they were¹
• Fed Chairman Jerome Powell also offered some commentary on the current state of the economy²
  • Regarding the labor force “it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market—an outcome we want to avoid. The unemployment rate, while edging up in July, stands at a historically low level of 4.2 percent and has been broadly stable over the past year. Other indicators of labor market conditions are also little changed or have softened only modestly, including quits, layoffs, the ratio of vacancies to unemployment, and nominal wage growth.”²
  • (Powell) “Labor supply has softened in line with demand, sharply lowering the “breakeven” rate of job creation needed to hold the unemployment rate constant. Indeed, labor force growth has slowed considerably this year with the sharp falloff in immigration, and the labor force participation rate has edged down in recent months.”²

GEOPOLITICS

• Trump administration appealing a lower court’s ruling last week that many of his tariffs pursued under a 1977 law meant for emergencies are illegal, urging the justices to fast track their review of the case³
  • At issue is whether Trump overstepped his authority in invoking the 1977 International Emergency Economic Powers Act to impose the tariffs, the first time the law was used for that purpose³
    • The federal appeals court said last Friday that US law “bestows significant authority on the president to undertake a number of actions in response to a declared national emergency, but none of these actions explicitly include the power to impose tariffs, duties or the like, or the power to tax”³
  • Should the Supreme Court uphold the lower court’s ruling businesses would likely demand refunds of previously paid tariffs, however the mechanics of how implementing/processing of those theoretical refunds would play out³
• U.S. President Donald Trump signed an executive order Thursday to implement a trade deal with Japan, with 15% baseline tariffs on most Japanese goods, including autos⁴
  • As part of the deal, Tokyo agreed to invest $550 billion in projects selected by the U.S. government and ramp up its purchase of American agricultural products, such as corn and soybeans, as well as U.S.-made commercial aircrafts and defense equipment⁴
    • Promised purchases by Japan include 100 Boeing planes, 75% higher imports of U.S. rice and $8 billion worth of agricultural and crop products⁴

FISCAL

• Lawmakers on Capitol Hill have less than four weeks to reach a deal to avoid a government shutdown at the end of September⁵
  • Lawmakers will likely consider a stopgap measure to keep funding going for federal agencies, but even that could face hurdles, as Democrats in the Senate appear uneasy about voting with Republicans to help them clear the 60-vote threshold⁵

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

ANNOTATIONS

1. Reuters. “Fed’s Williams sees gradual rate cuts but lets data drive when they’ll happen”. September 4, 2025
2. Federal Reserve. “Monetary Policy and the Fed’s Framework Review”. August 22, 2025
3. Reuters. “US Supreme Court poised to resolve clashes over Trump’s power”. September 4, 2025
4. CNBC. “Trump finalizes Japan trade deal with 15% tariffs as Ishiba faces discontent from within party”. September 5, 2025