Can Cuts Revive the Economy?

As markets brace for possible Fed rate cuts following Jerome Powell’s Jackson Hole speech, investors are weighing whether easing can jumpstart struggling sectors like housing and manufacturing. Interactive Brokers’ Senior Economist Jose Torres breaks down inflation trends, consumer confidence, and what a broader rally could mean for Wall Street.

Summary – IBKR Podcasts Ep. 288

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Andrew Wilkinson 

Welcome to this edition of the IBKR Podcast. Now, stocks and bonds both enjoyed a more positive tone following Fed Chief Jerome Powell’s Jackson Hole speech last week, and the interest rate market is now looking for two cuts starting in September. Joining me to discuss how that might affect the economy is Interactive Brokers Senior Economist, Jose Torres. 

How are you, Jose? 

Jose Torres 

Doing great, Andrew. Thanks for having me. How are you? 

Andrew Wilkinson 

Doing okay, thank you. I had the pleasure of interviewing Steve Sosnick earlier today and we talked all about the Powell meeting, and that podcast is now live. We’re recording this Monday afternoon, so this podcast should be going out Tuesday morning. 

Jose, Donald Trump has been screaming at Jerome Powell about the need for interest rate cuts. Which one of them has more sympathy from you? 

Jose Torres 

At this juncture, you know it is the president. I think for a while we’ve waited several months—several quarters already—for tariff-fueled inflation to show up in the numbers, and we haven’t really seen a meaningful impact from those tariffs. In fact, lately we’ve had inflation start to come in a little hotter, modestly hotter, and Andrew, it’s really been the services, not the goods at all. I think the reason why you’re seeing some services inflation is because we’re starting to get into an economic re-acceleration here. Folks are now more confident about the path ahead. In the first half, there were a lot of worries that levies would be way too elevated and that would’ve caused a recession or a slowdown. We’d have significant job losses. Now, in the second half of the year, you have a much more confident consumer. 

So, services inflation is really driven at this point by servicers being able to raise their prices. Two of the main categories where we’ve seen that pricing power exhibited have been with the airlines—the fares have been going up significantly. We saw that in the last CPI and PPI for the month of July to start the second half. That’s a big discretionary category. Airlines are raising prices in a low-oil-cost environment, driven by consumers wanting to get out there and embark on discretionary categories. 

The second one has been brokerage firms and advisory houses. They’ve been able to charge more and bring in more revenue. Part of that is the animal spirits in markets—rising asset prices and the exuberance we’ve been seeing on Wall Street, not just in equities but also in rates. We have a pretty strong Treasury rally on a year-to-date basis on both the short end and the long end. Back to the question—why should the Fed reduce rates 25 basis points? Inflation is in the mid-twos. We haven’t seen the tariff pressure from goods reflected yet. Fed funds is at an upper-end range of 4.50 with inflation in the mid-twos. The economy overall is doing great, but we have a lot of pockets that, when you look under the hood, are particularly weak. 

Number one is real estate—just awful. This morning, Monday, August 25th, we got new home sales terrible. Inventories are through the roof. Pricing power is in the tombs, in the basements. Builders are offering concessions, offering price discounts. Andrew, do you know that prices are down from 2022 when you look at the average and median? In certain months—we’d have to average it out—but just from a first glance, certain months in 2022 had higher new home prices than they do today in 2025, three years later. That’s certainly an area that could benefit from lighter borrowing costs. 

Now, we know the Fed controls the short end, but if they bring that down, you could have some confidence on inflation expectations. That’s going to work its way down on the long end as well. Also, credit availability when the Fed reduces on the short end, it does make credit more available and gives folks more opportunity to get into the real estate sector. 

Manufacturing—doing great from an investment perspective. Capital expenditures, dollars pouring in like the president says. But from an ordering perspective, it has been really weak all year. Now, we got a report last week from S&P Global, formerly IHS Markit, PMI Manufacturing, that showed a significant surge in ordering for this month, August. We have to see—data’s volatile. A lot of times, similar to ADP and BLS, S&P Global and ISM Manufacturing sometimes point in way different directions. So we’ve got to wait and see. But those are two areas that can benefit significantly from interest rate cuts real estate and housing, and then hiring. We don’t have that cyclical hiring strength. We haven’t had it for a long time. The gains this year, for the Trump administration, have been derived from private education and health services. Last few years under the Biden administration, you had those two leading, but you also had government. Of course, President Trump wants to reduce the federal government payroll headcounts, and that’s why that category isn’t offering a tailwind anymore. 

So we need more of the cyclical areas to start helping there as well. Final point—what’s also hampering real estate, as well as hiring and manufacturing to a different extent, is immigration. We have immigration restrictiveness right now. A lot of those immigrants that were coming in, they were working higher-income blue collar jobs like construction, air conditioning, plumbing—those kinds of jobs. They bring demand into the rental market. They eventually buy homes. From a demographic perspective, they have more children, more births. That offered a tailwind to the housing sector. 

Andrew, we got the existing home sales report last week. Prices year-over-year grew 0.2%. We are on the verge of going negative—falling home prices. New homes were already there, but existing is the much more significant market. That’s where most of Americans’ equity is. That’s a number that’s watched a lot more, and it’s on the verge of going negative. 

So I think that the Fed, with inflation in the mid-twos, should get started. Markets think they’re going to get started in September. I think they should have gotten started in June or July. And then see what happens with some quarter-point reductions, because that’s going to reignite economic growth, provide some stimulus to the economy, and help all those areas I just mentioned that could use a little boost. 

Andrew Wilkinson 

So, assuming the Fed does start easing policy, Jose, how will investors gauge the success of monetary policy easing? 

Jose Torres 

I think they’re going to gauge the success by stocks and what their performance is. Of course, that’s what most people care about these days in the Wall Street circles—what the stocks are doing. But also by inflation, right? Can you cut and keep inflation below 3%? Keep it in the mid-twos. 

During the first Trump administration, we saw inflation get up to 3%—roughly 2.9 and change—only to retreat back to the mid-twos. Similar story back then you had pricing power, servicers able to increase prices on consumers because growth was so buoyant. We had some quarters back then where growth ran in excess of 4%. So I think if you have stocks continuing to go higher and you have inflation remaining in the mid-twos, that is a success. But here’s the icing on the cake, folks the Russell 2000 is still below its November 2021 highs. It’s been more than four and a half years since then. We need a broader rally. We need more participation. 

These two years of returns in excess of 20% have been terrific—we’re not going to complain about that. But they’ve also opened the door to some vulnerabilities, namely concentration risk. We could use a broader rally, and rate cuts will certainly help. In fact, at Jackson Hole, small caps led that rally—up 4%. The IWM, the Russell 2000 ETF, was up 4% during that Jackson Hole speech because of monetary policy easing prospects. Other cyclical sectors in the large-cap space that’ll benefit from a rate cut are going to be industrials, materials, real estate, definitely technology, consumer discretionary, energy, and communication services. 

Andrew Wilkinson 

Excellent. Jose Torres, Senior Economist here at Interactive Brokers, thank you for taking the time to join me today.

Jose Torres  

Thank you, Andrew. Great to see you and looking forward to next time. 

Andrew Wilkinson 

Alright, and don’t forget—if you enjoyed today’s edition, please remember to subscribe wherever you download your podcasts from. Bye for now.