Fed interest rate decision looms in key week for markets: What to know this week
Stocks secured solid gains ahead of a key interest rate decision from the Federal Reserve, with investors weighing on how aggressively the central bank will cut interest rates.
The tech-heavy Nasdaq Composite ( ^IXIC ) led the markets, up nearly 6% in its best week of the year. That weekly best was echoed by the benchmark S&P 500 (^GSPC), which rose 4% as both gauges notched their fifth straight day of gains on Friday. The Dow Jones Industrial Average (^DJI) also ended the week in the green, up nearly 3%.
The positive swing came as traders flip-flopped on whether the Federal Reserve would choose to cut rates by 25 basis points or a stronger 50 basis points at the end of its two-day policy meeting on Wednesday. Whatever the size, it will be the first rate cut from the Fed in early 2020.
Former New York Fed President Bill Dudley said there is a “strong case” for deeper cuts as FOMC members try to steer the economy toward a “soft landing.” That, along with reports from the Financial Times and Wall Street Journal that suggested policymakers were struggling to come to a decision, raised expectations for a jumbo rate cut.
Outside of the Fed's decision, investors will keep an eye on consumer health, including August retail sales on Tuesday's docket. The housing market will also be top of mind after mortgage rates fell to their lowest level since February 2023.
A weekly update on jobless claims is also on the schedule, as well as an activity check from the manufacturing sector.
In corporate news, quarterly reports from FedEx (FDX), General Mills (GIS), Lennar Corporation (LEN), and Darden Restaurants (DRI) will headline the earnings calendar.
FedEx will be in particular focus, as earnings from delivery aggregation are often seen as a bellwether for the state of the broader US economy.
The Fed's big decision
The Fed will announce its next monetary policy decision on Wednesday. Markets are largely divided on whether the central bank will cut rates by 25 basis points to a range of 5.0% to 5.25% or by 50 basis points to a range of 4.75% to 5.0%.
Expectations for a 50 basis point cut on Friday saw a significant jump, according to the CME FedWatch tool. As of Friday afternoon, traders held a roughly 49% chance that policymakers would commit to that much larger rate cut, compared with just a 28% chance a day earlier.
There is a case to be made for both. On the one hand, inflation remains above the Federal Reserve's 2% target on an annualized basis, with expected readings on monthly “core” inflation prompting the Fed to exercise caution and cut only 25 basis points.
“With core inflation coming in higher than expected, the Fed's path to a 50 basis point cut has become more complicated,” Seema Shah, chief global strategist at Principal Asset Management, wrote after Wednesday's CPI report for August.
“The numbers certainly aren't a deterrent to policy action next week, but committee hawks will likely take over. [the] The CPI report is evidence that the last mile of inflation needs to be managed with care and caution – a 25 basis point cut is a scary reason to default.”
But other economic data points, including a jobs report that pointed to a weak labor market, suggest the central bank may already be behind the curve.
“We believe it's clear what the Fed should do next week: reset the policy rate 50bp lower to adjust for the changing balance of risks,” JPMorgan economist Michael Ferroli wrote in a note to clients on Friday. “It is less clear what the FOMC will do, but we are sticking to our call that they will do the 'right' thing and cut 50bp.”
In addition to its policy announcement, the Fed will also release updated economic forecasts in its Summary of Economic Projections (SEP), including its “dot plot,” which maps policymakers' expectations for where interest rates might go in the future.
In June, Fed officials saw the fed funds rate rising to 5.1% in 2024, suggesting just one 25 basis point cut to come this year. But the narrative has changed quite a bit since then. And with markets now pricing in 100 basis points for late 2024, Wednesday's dot plot will show investors whether central bank leaders agree.
“Our baseline still assumes a 25bp cut at every other meeting, but the Fed's aim to prevent further weakness in the labor market increases the likelihood of a faster pace,” Nancy Vanden Houten, chief US economist at Oxford Economics, wrote on Friday.
Overall, stocks are likely to be volatile, regardless of the direction the Fed takes. That makes Fed Chair Jerome Powell's post-decision press conference all the more important.
“Powell's job next Wednesday at 2:30 p.m. will depend a lot on what the committee chooses to do at 2:00 p.m.,” Ferroli said. “If it decides to cut 50bp, Powell will have to explain that the action is intended to support a view of sustained expansion in a low-inflation environment. If the FOMC instead opts for a 25bp cut, he will have to signal that the Fed stands to ease more aggressively at any sign of labor market softness. Ready.”
consumer check
A new reading on retail sales will also be closely tracked on Tuesday as investors wait to see if July's strong showing of sales can be sustained.
Economists expect August retail sales to have fallen 0.2% from the previous month, which would mark a significant drop from the 1% sales growth surprise seen in July. Excluding gas and autos, a 0.3% increase is expected.
Oxford Economics Vanden Houten said. “Real disposable income growth is proving resilient, and high-frequency indicators suggest that consumer spending continues to pick up.”
He added, “There are no signs yet that the weakness in the job market is feeding through the slower growth in consumer spending.”
Weekly calendar
monday
Financial Information: Empire Manufacturing, September (-3.7 expected, -4.7 prior)
Earnings: No significant earnings
Tuesday:
Financial Information: Retail sales, month-on-month, August (-0.2% expected, +1% earlier); Retail sales ex auto and gas, August (+0.3% expected, +0.4% prior); Industrial production, month-on-month, August (0.2% expected, -0.6% earlier); Manufacturing (SIC) output, August (0.0% expected, -0.3% earlier); NAHB Housing Market Index, September (41 expected, 39 prior)
Earnings: Ferguson Enterprises (FERG)
on wednesday
Financial Information: the Federal Reserve's monetary policy decision (cutting expected interest rates from 5.0% to 5.25% to a range of 5.25% to 5.5%); MBA mortgage applications, week ending September 13 (up 1.4% earlier); Month-on-Month Building Permits, August (+1.1% expected, -3.3% prior); Housing starts month-on-month, August (+5.8% expected, -6.8% prior)
Earnings: General Mills (GIS), Steelcase (SCS)
Thursday
Financial Information: Initial jobless claims, week ended Sept. 14 (230,000 earlier); Continued claims, week ended Sept. 7 (1.85 million earlier); Existing home sales month over month, August (-1.3% expected, 1.3% prior)
Earnings: FedEx (FDX), Lennar (LEN), Darden Restaurants (DRI), FactSet Research (FDS), Cracker Barrel (CBRL), Endava (DAVA), MillerKnoll (MLKN)
Friday
Financial Information: No significant economic release.
Earnings: Tamboran Resources Corporation (TBN)
Alexandra Canal A senior reporter at Yahoo Finance. Follow him in X @Ali_Khal, LinkedIn, And email her at alexandra.canal@yahoofinance.com.
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