Fed Cuts Rates

Overview: Over the past week, there were no major surprises from the Federal Reserve meeting or the inflation data. Consumer spending was a good deal stronger than expected, but its impact was minor. Mortgage rates remained near their lowest levels of the year.

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The Fed meeting on Wednesday confirmed that officials agree with investors that a lower federal funds rate is appropriate. As expected, the Fed reduced the federal funds rate by 25 basis points to a range between 4% to 4.25%, after holding it steady since December. The meeting statement echoed the prior one, emphasizing the high degree of uncertainty about the economic outlook due to changes in government policies. According to the statement, job gains “have slowed” while inflation remains “somewhat elevated.” The closely watched “dot plots” of individual expectations from officials forecast, on average, two more cuts before the end of the year, but there is a wider range of disparity between officials than usual. Most investors now anticipate another 25 basis-point rate cut at the next meeting in October and an additional one at the meeting in December.

The Consumer Price Index (CPI) is one of the most highly anticipated measures of inflation released each month. To reduce short-term volatility and get a better sense of the underlying inflation trend, investors generally look at core CPI, which excludes food and energy. In August, core CPI rose 0.3% from July, matching the consensus forecast. It was 3.1% higher than a year ago, the same annual rate of increase as last month. Although this annual rate has dropped sharply from a peak of 6.6% in September 2022, it is still far above the readings around 2% seen early in 2021, which is the stated target level of the Fed. 

Since consumer spending represents over two-thirds of U.S. economic activity, the Retail Sales report is an important indicator of the strength of the economy. While many economists have been predicting that consumers will reduce their spending due to economic uncertainty, there have been few signs of this happening so far. Retail sales in August surged 0.6% from July, far above the consensus forecast of just 0.3% and a massive 5% jump from a year ago. Categories displaying the most strength included restaurants/bars, sporting goods/hobbies, and apparel. Due to the strong results, economists increased their estimates for third quarter gross domestic product (GDP).

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Core CPI (annual % change)

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Week Ahead

Sept. 23

Existing-Home Sales report

Sept. 24

New-Home Sales report