Financial News for the Week of August 29th, 2025

President Trump continued to pressure Federal Reserve officials this week, this time attempting to fire Governor Lisa Cook for alleged mortgage fraud. The situation remains influx, as Cook is contesting the President’s actions in court. But the mere threat of her removal has sparked further concerns of central bank independence, sending shorter-term yields lower. The yield curve steepened on the week, with the 30-to-2-year spread widening to its highest level since early-2022 (Chart 1). Meanwhile, equity markets largely shook off the news, as investors’ attention remained squarely focused on this week’s earnings reports, including Nvidia and several large retailers. The S&P 500 briefly hit another all-time on Thursday, but retraced on Friday and looks to end the week slightly in the red.

Turning to the economic data calendar, the Bureau of Economic Analysis released its second estimate of Q2 real GDP. Relative to the first release, economic growth was revised higher by 0.3 percentage points to 3.3%. While net trade remained a major source of growth, a good chunk of the upward revision came from stronger business investment, specifically in categories that are likely tied to AI investments. In fact, spending on ‘computers & other peripheral equipment’ and ‘software’ accounted for all the growth in business investment through the first half of 2025.

Final sales to private domestic purchasers – the best gauge of underlying domestic demand – was raised from 1.2% to 1.9% and is now on-par with Q1’s rate of expansion. While this marks a deceleration from H2-2024 (Chart 2), it suggests the narrative of ongoing economic resilience hasn’t completely fizzled out amid ongoing trade uncertainty.

This point was further underscored in the Gross Domestic Income (GDI) figures, which accompany the second estimate of GDP and serve as an alternative measure of economic output. Real GDI rose a healthy 4.8% in Q2 – up from a flat reading in Q1. Corporate profits rose 7% annualized, despite elevated cost pressures from tariffs, while household income also continued to expand at a +5% clip.

Despite the healthy gains in income, households have become increasingly selective in their spending. Real PCE rose 0.3% month/month in July, with most of the gains coming from an increase in durable goods. Vehicle sales had a heavy hand in the uptick, as consumers appear to be pulling forward purchases to get ahead of tariff price increases which will likely materialize later this year once OEMs roll over to 2026 models. But it’s the discretionary services spending that remains weak, a theme that has played out through most of this year and something that’s unlikely to change until households have more certainty about the economic outlook.

With inflationary pressures heating up, this is unlikely to come anytime soon. Core PCE inflation rose 0.3% m/m, pushing the year-ago measures to 2.9% – a five-month high. Hotter services inflation was the major driver in last month’s uptick, something that is likely to further embolden Fed hawks. This puts next week’s employment report sharply in focus. Consensus currently expects payrolls to add 75k jobs in August. A stronger reading could push back on the odds for a September rate cut, which is currently 90% priced in.