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Weekly Update 09/19/2025: Fed Lowers Rates

Insights
  • Solid retail sales data
  • Microsoft boosts dividend
  • General Mills starts new fiscal year
  • Oracle's TikTok relationship strengthened

 

Retail sales data

The Commerce Department reported Tuesday that the value of retail purchases, not adjusted for inflation, rose 0.6% last month after a similar gain in July. That beat all estimates in a Bloomberg survey of economists where the median projection was for a gain of 0.2%. Excluding autos, sales rose 0.7% in August. Nine out of the 13 categories tracked reported increases, led by online retailers, clothing stores and sporting goods. That suggests the back-to-school sales for retailers was strong. It is the most important time of the year for sellers after the holiday season.

This is another example of “hard data” presenting one picture, while “soft data” presents a different view. While consumer sentiment remains low and job seekers are reporting that landing a position is getting harder, this retail data shows consumers are still opening their wallets and putting their credit cards to use. Some of the impetus may be coming from a “wealth effect” boosted by equity indices hitting record highs. The stock market rally has put more money in the pockets of the wealthy, in particular, where demand has historically been inelastic to bumps in the economy.

The big question remains how long does this spending continue if the market falters or if layoffs rise more sharply? Time will tell also if the data, which is not adjusted for inflation, is merely reflecting a higher, tariff-boosted price of a product or if more volume is actually being sold. Evidence of the later is that spending at restaurants and bars, the only service-sector category in the retail report, rose by 0.7% in August after declining the prior month. Companies, judging from second quarter conference calls, have largely refrained from passing along price hikes in order to not spook customers. Eventually, that will become evident in smaller margins and smaller profits and potentially lower stock prices. Keep reading every week for updates!  

The Fed

Chairman of the Council of Economic Advisers (CEA) Stephen Miran was confirmed by the Senate to join the Federal Reserve board. The Senate voted along party lines in a 48-47 vote just two weeks after being nominated by President Trump making it the second-fastest Fed confirmation in more than a quarter-century. What made the move so historic was that Miran is not leaving his White House position making him the first executive branch official to sit on the central bank’s board since 1935. Miran will take unpaid leave from the CEA to fill the remainder of a Fed board term that runs through January which opened when Adriana Kugler unexpectedly stepped down last month.

This is the latest salvo by the current administration to influence the thinking of the independent Federal Reserve Board. Miran’s economic projection will be included when the Fed provides their quarterly summary of economic projections this week. That will influence market makers which use the Fed’s estimates as inputs to their model. Meanwhile, a federal appeals court rejected an emergency Trump administration request to remove Federal Reserve Governor Lisa Cook ahead of the meeting. The divided three-judge panel left in place a lower court injunction that blocked her termination while she challenges the legality of Trump’s move. In a statement explaining the appeals court’s decision, two of the judge’s said there was merit in Cook’s claim she was not given proper notice or opportunity to respond to her firing. She has not been charged with a crime and, in court filings, has denied committing mortgage fraud.  

All of these happenings set the stage for the Federal Open Market Committee (FOMC) meetings that took place on Tuesday and Wednesday. The committee decided to reduce the federal funds target by 25 basis points (0.25%) to a range of 4.00%-4.25%. In the post-meeting statement, the FOMC wrote: “Recent indicators suggest that growth of economic activity moderated in the first half of the year. Job gains have slowed, and the unemployment rate has edged up but remains low. Inflation has moved up and remains somewhat elevated.” That was basically a statement that can be interpreted to say: “Our job is hard.” That struggle between employment trends and pricing pressure is always at work, and even more so now given the volatility introduced by tariffs and singular focus to reduce government spending through workforce reductions by the current administration. Another key phrase hinted at why the FOMC decided to cut rates now after being on hold since December 2024: “The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment have risen.” In other words, weakness in the labor market—whether that be in fewer job openings or lower immigration or those struggling to gain full-time employment after a sustained layoff—has become the prime concern over inflationary levels. We have written before that a solid employment market is really a prerequisite to having stable prices and when it came down to choosing one mandate over the other, the Fed would lean towards labor solutions. The vote of the committee was 11-1 with Newly sworn-in Stephen Miran, voting against the FOMC decision, favoring a larger 50 basis point cut. Governors Waller and Bowman, who both dissented at the last meeting in favor of a cut, voted in favor of the cut this week.

The median projections of the 19 members (the seven members of the Board of Governors and the presidents of the 12 regional reserve banks) showed that expectations were for two more cuts to occur this year. But the dispersion among the members was some of the widest in history. One member called for five more cuts before year-end and is widely thought to be Miran though the identity of the members is hidden on the so-called “dot plot.” The graphic shows that six members expect no further rate cuts this year while two project one more 25 basis point haircut.

The Fed also releases its summary of economic projections (SEP) on a quarterly basis. Fed officials maintain a median inflation estimate of 3.1% at the end of the year, the same forecast in June. The latest personal consumption expenditure report, the Fed’s favored inflation proxy, showed a reading of 2.60% with the consumer price index level at 2.9%. For 2026, the median sees inflation at 2.6%, up from 2.4% prior. Meanwhile, the SEP showed an increase in the estimate for GDP to 1.6% by the end of 2025 and 1.8% in 2026, up from 1.4% and 1.6%, respectively, previously.  What is our take? The Fed has judiciously introduced a rate cut as data for the labor market has begun to show underlying weakness that can be due to a variety of factors. However, a larger cut at this time is not warranted. Why not? Because no one knows what effect tariffs will have on the coming months. A base case can be argued that it is a “one time shift” in the price level. But, as Chairman Powell said in the post meeting news conference, “It is also possible that the inflationary effects could instead be more persistent.” Data is showing that short-term inflationary expectations are rising, but, for now, longer-term expectations remain anchored. “Our obligation is to ensure that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said. History has shown that once a central bank loses its credibility as an inflation-fighting body, markets conclude that prices are going to move higher because inflation, once it gains momentum, is a self-sustaining phenomenon. Powell has repeatedly said that public trust is the most important asset the Federal Reserve possesses. Famed investor Warren Buffett echoes those sentiments: “Trust is like the air we breathe. When it’s present, nobody really notices. But when it’s absent, everybody notices.” Based on the current economic environment, this week’s decision seems to be the most prudent path.    

Company News

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