Over the past week, notable developments included retail sales figures and the Federal Reserve’s interest rate decision. Retail sales for August showed expected growth, yet concerns persist about the strain on lower-income consumers. The Fed’s decision to cut interest rates by 50 basis points to 4.75-5% reflects a mixed approach with stimulating the economy through rate cuts, while quantitative tightening remains in effect to curb excessive spending. The prediction of future rate cuts suggests a trend towards easing financial conditions, although there’s market speculation that goes beyond the Fed’s projections.
In the labor market, job creation faces challenges with fluctuating unemployment rates expected to rise slightly by year-end. The Fed acknowledged increased immigrant participation as a factor affecting job statistics and noted ongoing confidence in labor market strength. Projections indicate unemployment will rise from 4.2% to 4.4%, although weekly jobless claims have seen a decrease recently. The unusual combination of rate cuts and soaring interest rates indicates possible lagging adaptability to current conditions.
The housing market has positively responded to declining mortgage rates, up from 8% last year to 6.17%, fostering increased mortgage applications and home demand, despite a persistent housing shortage. Market reactions to the Fed’s actions were initially mixed, suggesting caution due to broader economic uncertainties, but eventually turned positive. As the Fed doesn’t overtly challenge government fiscal spending, concerns over unsustainable spending linger. Overall market indices like the S&P 500, DOW, and NASDAQ have shown upward movement this week, while GDP growth projections remain cautiously optimistic with expectations of moderate economic slowing.
This week, the focus was on retail sales and the Federal Reserve’s decision on interest rates. On Tuesday, we received August’s retail sales figures, which were largely in line with expectations, showing a 0.3% monthly increase and a 3.9% year-over-year rise in nominal terms. However, concerns persist about the financial struggles of low-income consumers.
The real market mover was Wednesday’s Federal Reserve decision. The Fed’s Open Market Committee announced a 50 basis point rate cut, bringing the Fed funds rate down to a 4.75 to 5% range. Additionally, they reduced security holdings, indicating a mix of economic stimulus and tightening.
Fed Chairman Jerome Powell commented on the labor market during a press conference, noting a narrowing of available jobs to workers. He addressed the impact of immigration on unemployment, with recent job creation figures showing about 116,000 jobs added monthly.
The Fed’s projections suggest the unemployment rate will edge up to 4.4% by year-end, higher than their June forecast. Historically, when unemployment increases by 0.5%, it is followed by a more significant rise.
The unexpected 50 basis point rate cut signals that the Fed acknowledges underlying economic pressures, despite their optimistic statements. As we continue monitoring, the housing market is showing signs of recovery, with mortgage rates dropping to 6.17% from an 8% peak. This encouraged a surge in mortgage applications by 14.2% and increased refinancing activities.
Interestingly, despite the Fed’s rate cut, markets initially responded with caution before closing the week on a positive note. The general consensus appears to support the Fed’s actions, viewing them as measures toward a soft landing. The equity markets reflected this sentiment, with the S&P 500 gaining 1.5%, the Dow up by 1.9%, and the NASDAQ climbing by almost 1.9%.
Looking ahead, next week promises key insights with final figures on second-quarter GDP and the Fed’s preferred inflation gauge, the PCE numbers. These data points will further illustrate the state of the economy, currently expected to maintain a 2% growth into 2026.
In The Know – September 20, 2024