Time For The Fed To Act

Stocks opened broadly higher again this morning, brushing off a weaker than expected labor market report. The Dow is up 550 points and the S&P 500 is up .7%. Perhaps it’s all about expected interest rate cuts from the Federal Reserve. And indeed, some of the sectors rallying the hardest—real estate, materials, financials—are the ones that typically perform best in lower-rate environments. The bond market is also rallying today, pushing interest yields lower and pricing-in more Fed rate cuts. So everyone is making money.

The Consumer Price Index (CPI) ticked up to an annual rate of 2.9% last month vs. 2.7% in the prior month. The increase was driven by gasoline and groceries. Core CPI, which excludes those categories, held steady at 3.1%. While tariffs haven’t yet boosted inflation as much as feared, they seem at least to be preventing inflation from falling back to the Federal Reserve’s 2% target.

Despite modestly higher inflation, investors & economists are absolutely certain the Federal Reserve will cut interest rates by .25% later this month. And they’re suspecting that cut may even be .50% followed by another .25% before year-end. Why? Recent data strongly suggest the labor market is softening. First time filings for unemployment insurance—called initial jobless claims—spiked last week too 263,000. While not a panic number, it is the highest weekly reading since late 2021. And coming on the heels of the Bureau of Labor Statistics’ massive downward revision of job growth in 2024, Fed officials are on notice that rates need to come down; they can no longer sit on the sidelines.

Bottom Line:
• Economy: Inflation is stubbornly above target, while rising unemployment claims hint at a cooling labor market.
• Fed: A rate reduction seems likely in September, with further easing expected next year unless inflation continues to move higher.
• Markets: Equities are rising, anticipating lower rates and helped by strong tech momentum, while bond markets are pricing in a Fed policy shift toward lower rates.