Fed rate cut recap, China trade talks, earnings update and planning through ambiguity.
The Federal Reserve lowered the federal funds target interest rate this week by 25 basis points to a range of 3.75% to 4%. It was the second rate cut of the year, and now rates are 1.5% lower than they were at this time in 2024. Investors were hoping for this news, but the announcement did not come without a few wrinkles.
First, there were two dissenting votes to the decision. Recently appointed Governor Stephen Miran voted in favor of a larger 50-basis-point reduction, while Kansas City Fed President Jeffery Schmid dissented in favor of no reduction. Underscoring the divide between hawks and doves, Schmid’s dissent reinforces the notion that far from all Fed officials are in support of a notably dovish pathway for rates. Market participants appear to be reading the dissent in a similar fashion.
Heading into the meeting, the market was putting odds of a December rate cut at 90%, according to the CME’s Fedwatch Tool. Fed watchers put odds of a December cut at just under 63% as of this morning, which was likely also influenced by commentary from Fed Chairman Jerome Powell, who indicated another cut this year is far from baked in.
“There are strongly differing views about how to proceed in December,” Powell said in his post-meeting press conference. “A further reduction in rates in December is not a foregone conclusion. Far from it.”
Indeed, the next Fed meeting is now a jump ball, even more so because there is no data until the government reopens.
“This is a temporary state of affairs,” Powell said, referring to the shutdown. “We’ll do our jobs and collect every scrap of data we can find. I’m not saying it will affect the December meeting, but what do you do if you’re driving in the fog? You slow down. There’s a possibility it will make more sense to say we really can’t see, so let’s slow down.”
Powell added that with rates between 3.75% and 4%—down 150 basis points from their 2024 peak—they are back in the 3% to 4% range where many economists believe the “neutral rate” currently lies. That’s where rates are properly balanced between the Fed’s two mandates of maximum employment and stable prices. Some on the committee, Powell said, seem to think it’s time to take a step back, pause and better understand whether recent labor weakness continues and whether recent economic growth is improving.
Of course, if the Fed does truly fear emerging labor market weakness, some may view the window of opportunity as limited, prompting support of action sooner than later even without updated data confirmation. After all, amid a potentially more robust growth profile at year-end, or an increasingly spendy consumer during the key holiday shopping season, or turning the page into 2026 should businesses ramp up the passthrough of higher costs to consumers, any one or a combination of these factors could drive inflation higher, severely limiting—if not entirely retarding—the Fed’s ability to further cut rates should it adopt a wait-and-see approach.
Tariffs surfaced in Powell’s press conference when he was asked about inflation. Goods inflation is up partly due to tariffs, Powell said, though it may be just a one-time impact. He estimated that the annual Personal Consumption Expenditures price index, or PCE, which was supposed to come out today but won’t due to the shutdown, would show 2.8% core and headline inflation. Without the tariffs, he added, core inflation—excluding food and energy—might be closer to 2.3% to 2.4%.
Speaking of tariffs, President Trump and Chinese President Xi Jinping concluded their discussions this week with an optimistic tone: “On a scale of zero to 10, with 10 being the best, I would say the meeting was a 12,” Trump said shortly after his first in-person meeting with Chinese President Xi Jinping since he returned to the White House.
The two leaders agreed to roll back export controls and reduce other trade barriers, potentially stabilizing relations between the world’s biggest economies after months of turmoil.
They agreed China would pause sweeping controls on rare-earth magnets in exchange for what Beijing said was a U.S. agreement to reverse an expansion of restrictions on Chinese companies. The U.S. will also cut fentanyl-related tariffs on Chinese goods in half, while Beijing resumes purchases of soybeans and other American agricultural products.
Investors mildly applauded the news, but this latest truce represents just nominal progress, at best preventing an immediate escalation between the world’s two largest economies. The big thorny issues over Taiwan, tech supremacy and national security concerns persist.
Earnings from mega-caps also kept investors busy this week, as tech darlings like Microsoft, Alphabet, Meta, Apple and Amazon all reported. There was some choppiness in trading on these big tech names due to concerns over AI capex spending sprees; Alphabet, Meta and Microsoft highlighted their collective $78 billion in capital expenditures just last quarter, an 89% year-over-year increase!
However, by week’s end, the sector’s relentless surge continued higher, as Alphabet, Amazon and Apple helped offset some worries created by Meta’s and Microsoft’s results. Likewise strong was Eli Lilly, as sales of diabetes treatment Mounjaro rose 109% year over year, and obesity drug Zepbound sales climbed 184%. Less exciting were results from Chipotle Mexican Grill, who cut their sales outlook as they deal with traffic decline and economic pressure on its core customer group of 25- to 35-year-olds. CEO Scott Boatwright highlighted how “This group is facing several headwinds, including unemployment, increased due loan repayment and slower real wage growth.”
Finally, there has been no progress on the government shutdown this week, and tomorrow is when funding for the Supplemental Nutrition Assistance Program (SNAP), which provides food stamps and other assistance for about 42 million Americans, is expected to run out. On Wednesday, we got an early look at insurance rates for federal plans without Obamacare subsidies. The data showed 30% increases in federal plans and 17% average increases in state plans.
On this particularly spooky month end, Fed Chairman Powell’s analogy of driving in a fog really stuck with me. Slowing down while conditions are cloudy is good advice. It doesn’t mean you stop driving but you calibrate to the conditions on the road ahead. We are here to help you do that, by making prudent rebalancing decisions within portfolios we oversee and as your partner on your financial plan. It is a good time to review how your costs may have changed in these recent years and make sure we are fine tuning those in your plan. We should discuss gifts you may be inclined to make, to family or charity, and deferred maintenance, car purchases, or home improvements that are closer to reality now that the page is about to turn on the calendar. If we can bring the road conditions you control into sharper clarity, we can accelerate faster to your goals through the fog of markets, politics, inflation, interest rates and all the other risks.
Written by a human.