Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics Including the markets the economy human ingenuity and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, August 22nd 2025. I’m Brian Pietrangelo, and welcome to the podcast.

This week marks the time of year again when people go back to school, including those very young going to kindergarten for the first time. Pretty emotional for a lot of families, or it might be your first day in high school. And also on the other end of the scale, young adults going to college for their first experience. What an emotional opportunity, both thrilling and a little bit anxiety-ridden, as it might be for those going off to a new endeavor. So we wish everybody luck including not only the students but also the parents.

In addition, this week I had a unique opportunity to attend a celebration during the week honoring veterans for their military service. What a tremendous ceremony to attend. Now there was no special occasion or date associated with this because we're about midway between Memorial Day and Veterans Day in between May and October and November. So just a reminder for everybody, what a great opportunity if you have an opportunity to thank a veteran for their service. I just wanted to share that experience that I was able to attend in terms of the celebration for our veterans and our local community. Just wanted to remind everybody to say thanks.

With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more: George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head Of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic news, we'll get Steve's take on a little bit of the market pullback this week. In addition, the number of economic releases this week was very small in terms of a light calendar this week, but the big news was at the end of the week when we talk about Jay Powell's speech at the Jackson Hole Economic Symposium. On the economic release front, only two updates for you. Initial weekly unemployment claims for the week ending August 16 came in at 235,000, which was a modest increase. Again, this number has remained stable for roughly the last 18 months, so good news there in terms of no significant spikes. And second, according to the National Association of Realtors, existing home sales increased by 2% in the month of July. Now this was a little bit of an upside surprise given that prior months had been negative in terms of growth, in terms existing home sales, again, due to this conundrum of high prices and overall high mortgage rates. So again, seeing a little of a loosening in this data point is good. We'll continue to watch this overall in terms of the overall housing market.

And finally, on the concept of the Federal Reserve, a lot going on. One, we've got the Federal Open Market Committee meeting minutes that were released on Wednesday from the meeting back on July 30th. We'll get Rajeev's take on that as well. And then, of course, we'll lead into Jay Powell's speech here, again, we had just this morning in Jackson Hole, so we'll get right into it. Rajeev, let's talk about it in terms of the minutes, Powell's Speech, and anything else going on with the Fed on your mind. Rajeev?

Rajeev Sharma [00:03:42] So Brian, there were a couple of things that happened this week. We got a look at the July FOMC minutes. The minutes were hawkish, but they seemed really stale because that July FOMC meeting took place prior to the release of the lower than forecasted July jobs report. So the jobs report really flipped the script as far as the focus from inflation went to the cooling jobs market. But if you read through these stale minutes from the Fed for the July FOMC meeting, Some Fed members are worried about inflation pressures. That continue as tariffs take time to work through the economy. Other Fed members, they noted elevated asset evaluations and others said that the current rate may not be far above neutral. Now we all know that we've heard Governor Christopher Waller, he suggested that we are well above the neutral rate, but other members of the committee are not really convinced. Again, these minutes are stale news as the focus of the majority of the Fed members they were looking at inflation being the major risk. And that was really in their minds outweighing employment concerns. But then we got that jobs report that really showed a shift of the focused feds dual mandate towards more towards the cooling of the jobs market.

And all of this Fed minutes and everything that's happened this week really took a backseat to Fed Chair Powell's speech today at the Jackson Hole Symposium. And my take on this is that Powell pivoted today. This was the dovish Fed Chair Powell the market was waiting for, and they got it today. Powell began his speech really pointing towards the shifting balance of risks for inflation and full employment. And this may warrant an adjusting of the Fed policy. Now traders took to the message immediately right before the speech, market expectations for September rate cut has started to slip and we got down to about 65% odds for a September rate. As soon as Powell started speaking today, those expectations hit 100% for a 25 basis rate cut for September's FOMC meeting. Traders really focused on Powell's emphasis on the downside risks to the labor market. It's also important to note here that the market has stepped up their expectations for additional rate cuts going into next year. After Fed Chair Powell's speech today, markets are now pretty close to fully pricing in five rate cuts by September of 2026. So again, these numbers are going up. The market obviously feels that once the Fed starts cutting rates, they're not going to pause. They're going to continue with the rate cutting cycle as they've typically done in the past. And, you know, when we're going into the statement today from Fed Chair Powell, the market, in my opinion, was somewhat nervous. They didn't really know what kind of line that Fed Chair Powell would speak to. I mean, up to this point today, it's pretty much been a wait and see narrative that we've seen from Fed Chair.

But following the speech today, yields across the yield curve drop sharply. We saw the two-year treasury note yield drop six basis points to 3.7%. We saw that 10-year down 16 basis points, to 4.26%. The yield curve is steepening and will likely continue to steepen with these rising odds of a September rate cut. It's exactly what we saw after Fed Chair Powell's dovish shift that we saw at Jackson Hole last year, where we finally saw the yield curve go positive after a long period of being inverted. And I think we're gonna see more of this steepening going forward after the speech today.

Now, the caveat to all of this is that we still have a CPI report that's due. And another payrolls print that we have to get through before the September FOMC meeting. So obviously the odds of a September rate cut are not a given, even though we're at 100% right now, those odds continue to change. Those two reports are gonna be extremely important for the Fed and extremely important for investors. There have been a faction of investors out there that are calling for a 50 basis point jumbo rate cut come September. And that argument for a fifty basis point rate cut. September has gathered some steam today after today's speech, but that might be a little overdone in my opinion. We still need to get those two data prints for inflation and the labor report. You would need another really bad jobs report to get the Fed to match calls for a 50 Base Point jumbo rate cut in September.

Brian Pietrangelo [00:07:47] Right, Rajeev. There's some other news this week, directly and indirectly related to Fed policy, and that is Fed Governor Cook and the criticism she is taking. You want to give our audience an update on what that means and why it's important to Fed policy overall and the governors on the board.

Rajeev Sharma [00:08:03] Sure thing, Brian, it's a very interesting report. Wall Street Journal reported that Donald Trump was considering firing the Fed Governor, Lisa Cook, and this is after, you know, he really called for her to resign after allegations from FHA Director Bill Pulte that said that she submitted a misleading mortgage application. And there's other caveats associated with that as well.

But removing Cook really sent some shockwaves through the markets. We did see the two-year tumble to its lowest point before today to around 3.72 percent as soon as that report came out. The reason why the two year would go down on this is removing Cook would open the door for another dovish Trump pick and could potentially add another vote for rate cuts. So the impact was definitely felt in the front end, which is most sensitive to monetary policy. So we did see that two year fall earlier this week. The dollar also extended declines on the news. It's a very interesting situation here because the president does have the authority to fire a government, a fed governor, if there is cause. Now, if you're looking at what cause really means, I think this is going to be what the big point will be here is was there cause was there malice in that mortgage application? Many feel that there was. So it's going to be very interesting to see how the Fed members, other Fed members react to this. I think the question of the independence of the Fed again starts to come into question again. Does the president have the authority to take a Fed governor out? So a lot of these moving parts are there. They're obviously going to take an impact on the markets and the bond markets. We're going to see most of the impact of this news as it plays out in the front end of the yield curve. And more than likely, whoever would replace Cook, if that were to come down to it, would be somebody who'd be more dovish and be more of an advocate for rate cuts going forward.

George Mateyo [00:09:50] Yeah, it'd be interesting. I think we talked about this last time, Rajeev, in the sense that the last Fed meeting you just previewed and kind of I guess you just maybe had a post-log, I guess, if you will, epilogue to it in the since the minutes just came out this week were kind of interesting in a sense, as you noted, two people dissented. And that's kind of rare for the Fed. What would be even more rare is if this new appointee or this vacancy that's caused by Governor Cook's departure for whatever reason. You could have all of a sudden then maybe three dissenters. And I think I went back and looked, and I think the last time we had three dissenters at the Fed meeting was 1988. So we're in some kind of, I guess, period of time where you could see a lot more volatility within kind of the boardroom, so to speak, that creates even more public uncertainty for the bond market, as you noted.

The market seems to be kind of taking the news today though and in stride as you noted short-term yields are really falling quite notably that's putting upward pressure on bond prices in a good way and we've also seen kind of a renaissance of late in small cap stocks which historically have been laggards for much of the last few years frankly and now we're seeing kind of a burst of up performance there and that's not surprising that's something that we've I've been anticipating too, thinking that the mega cap part of the market was probably due for a bit of a pause in terms of its leadership. And now we're starting to see the broadening out taking place in other sectors as well.

But I think it's important to note from my perspective that inflation expectations still need to be anchored, right? I think the Fed is still kind of dealing with a bit of a stagflationary environment where they're seeing growth, as you noted, slowing down a little bit. The labor market cooling off a little bit is something we've talked about now for several weeks. And at the same time, inflation is starting to kind of stay maybe somewhat sticky or somewhat elevated. Powell, in his notes today, I thought was kind of interesting, kind of gave some credence to the view that maybe inflation could come down. In other words, we could see this kind of jump of inflation when some of the full impacts of tariffs are going through the economy. But those might be somewhat short lived. Maybe transitory to use a word that he got in trouble with not too long ago. So I do think that we're going to have to still to navigate our way through some overall kind of stakeholders uncertainty because typically when you have a stakeholder shock, again, the Fed is kind of in a tough position where they see growth flowing. They want to react to that and maybe cut rates, but at the same time, they can't really react in a big way because inflation is still somewhat elevated. So the key for the stagflationary playbook, as I see it, is for the Fed to do as little as they possibly need to do, but maybe do a little bit, but at the same time recognize that if they're going to continue to think about cutting rates, they really need to see inflation expectations come down, or at least stay somewhat anchored and not really become elevated. So that's going to be, I think, a key thing for us to watch.

And of course, this week, Steve, we've got some interesting information from some big retailers as relates to inflation. I'd be kind of curious to get your thoughts on that as well, as we think about what we've heard from some of the big retailers on the state of consumer and inflation as well.

Stephen Hoedt [00:12:45] Well, George, you know, with the numbers coming out from Walmart kind of weak and discussing the situation with the consumer, I mean, it's very clear that the consumer here in the U.S. is weak relative to where it was maybe, say, three, six, 12 months ago that's being offset by AI and the spending on data centers. So you've got this really this huge bifurcation in the U.S. economy between, let's call it generically, CAPEX, which is focused largely on data center and then the consumer. The consumer, whether you look at things like sales at Chipotle and Cava, for example, are down, right? Those stocks have kind of cratered. That fast casual dining segment is under a lot of pressure right now. That's been a darling of the market over the last few years. You see the potential for trade down there. Walmart talking about it. I mean, that's kind of your core middle-class American consumer and others. So, I think it's a situation that bears watching here as we head into the back the year because what the Fed is talking about is weighing off kind of that growth versus inflation trade. And when you look at inflation, basically, inflation has come down and has been hanging out in that 2.7% to 3% area now for almost a year. And it really does feel that if the Fed is going to start cutting rates, while they will not formally ever change their inflation target, 3% is the new 2%, then we should get used to it, because it sure does feel like that's the way that the market is set up right now. We've accepted that inflation is running somewhat hotter than it did for the last 20 or 30 years, and it feels to us, or feels to me anyway, like the market, is kind of accepting that when you look at equity performance.

George Mateyo [00:14:39] Interesting though, just to catch you off on that point though, Steve, I would think that all is equal if you had a higher cost of capital, higher interest rates, that normally would probably lead to lower multiples on stock prices. And yet at the same time, as we've talked about now for the past several weeks, we're at peakish levels, if you will, with respect to multiples today. So how do you reconcile that idea?

Stephen Hoedt [00:14:59] Well, it feels to me like the market is anticipating that there's gonna be some kind of, and forgive me for going down this path, but some kind fed treasury accord where the long end of the yield curve gets bolted down to artificially low levels in order to reprice the ability of the federal government to pay its interest, make its interest payments. I mean, if you look back historically, there was this kind of a setup in the 1950s. Were pegged at 1% for a decade. Not saying that that's the path we're going to go down, but you know, Bessent has been very forceful in his language about wanting rates lower and you know kind of does start to beg the question if we're not going to get some kind of a fiscal capture of the central bank. Not so much that, you know to the argument before that we're talking about the Fed independence because I think this is a totally different discussion because we've gone down this path before. Like we had that situation post-war in the 1950s, where rates essentially were pegged. And I think the market is kind of smelling out that there's something going on here. And it doesn't buy the idea that rates are going to be structurally higher. I think that they think that rates aren't maybe going to be structurally lower. And that creates a totally different dynamic.

George Mateyo [00:16:13] So great thoughts and some possible things to think about longer term, I guess, in the more near term, though, Steve, as I mentioned in my little remarks, we've seen some rotation away from some of the big high flying tech companies that people talked a lot about for the past several years, and maybe a bit of rotation into something more cyclical. We've talked about the cyclical trade, we talked about small caps. We talked about international stocks, which are still doing quite well overall. But as you think about kind of the setup for next week, we got, of course, a big earnings release from one of these major tech companies. How do you think the set up looks and what should we be thinking about as we think about the way ahead?

Stephen Hoedt [00:16:46] Look, just so everybody knows, we're talking about Nvidia. They report earnings on the 28th. Obviously, it's the most important stock to the market. And I think that one of the more interesting things to me about this is that it's gonna come during what, on Wall Street anyways, is the biggest holiday week of the year, the week prior to Labor Day. So like, there is gonna be nobody around when this earnings announcement is coming out in terms of market participants. So I'm expecting an outsized reaction to whatever they release simply because of low liquidity conditions. And we'll see what happens. I think that the numbers should come in fine. There's been a lot of momentum in terms of what people have been talking about, about spending coming into this. But at the same time, there's a lot of expectations. So it's kind of hard to get over the high hurdle. We'll see how they do. To your point on international stocks, George, that's really the thing that jumped out to me, most this week. We saw Chinese stocks break out to 10-year highs on massive volume. We've got a across the board rally happening both in Europe, North America outside of the US. Canada broke out this week, Australia broke out in Asia. So we've got global bull market in earnest occurring here in non-US stocks. So it's something for people to keep in mind that while no allocation to non-U.S. Equities has been the way to go for the last 10 plus years. It does feel like right now we're in a place where that is a very, very different situation.

Brian Pietrangelo [00:18:23] Is Steve finishing the podcast with one last question for you as we come off NVIDIA chips? There's been some news and some buzz in the market about Redirecting Chips Act dollars and also potentially the government taking an ownership position in tech stocks. You want to give our listeners just a quick response to what that might mean?

Stephen Hoedt [00:18:40] So specifically talking about Intel, there was news this week that the federal government's investigating whether or not to take a stake in the company. I think if you look at this historically, when the federal governments involved taking stakes in things, it's not historically been a great sign or bellwether for the firm. You can make an argument that chips production here domestically in the United States is a strategic imperative. So there's a reason for them to do it. I Think market participants feel that there are better ways to accomplish that than taking direct stakes in companies and trying to pick winners and losers because it's very clear that if you go back over the last 20 or 30 years relative to its global peers, Intel is a loser relative in terms of chip manufacturing and companies like TSMC and others are the winners. And there's a reason for that. So, you know, it feels to me like it's better, we're better off kind of going down the path of incentivized SMCs and the best. Companies in the world that do this to maybe move some more production to the United States than we are to try to build our own national champions. But we'll have to see how it goes. We say it all the time, but we're definitely cursed to live in interesting times when we've got this kind of stuff going on. You never would have thought five years ago that the U.S. Would be talking about buying a stake in Intel.

Brian Pietrangelo [00:20:04] Well, thanks for the robust conversation today, George Stephen Rajeev. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information, and will catch up with you next week. To see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

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