The stock market may be range bound this week, as there are few data releases and the major indices are at or near record highs. Although the market should be underpinned by the Fed's intention to lower rates further, there could be caution ahead of historically seasonal weakness in early October. Also, key US economic data in early October may dampen expectations for the pace of future Fed easing.
The Fed expects to cut another 50 BPs by year end, another 100-150 BPs in 2025 and 50 BPs in 2026. The funds rate would level off between 2.6% and 3.6%. This week's US economic data are not expected to be a problem for this plan, but there could be problems in the following week.
The Fed appears determined to "recalibrate" the stance of monetary policy, based on Fed Chair Powell's comments at his post-Meeting news conference. He said policy needs to be adjusted to reflect a labor market that is no longer very tight and inflation that is close to target. This sounds like a policy path that is set regardless of unwelcome surprises in economic data. However, Powell said the pace of the re-calibration will depend on incoming data. He may repeat all this in a speech this week (Thursday).
What seems to be important is whether and by how much upcoming data change the Fed's outlook -- not what the data say about the current state of the economy. Unfortunately, it may be more difficult for market participants to ascertain the data's impact on the Fed's outlook than what they mean for the current economy. Perhaps it will take substantial unfriendly data surprises to change the Fed's policy intentions.
Powell indicated that what matters most are the paths of the Unemployment Rate and inflation -- the two mandated measures against which Fed policy is judged. If economic growth is stronger than the Fed's published forecasts, it may not matter as long as the Unemployment Rate remains little changed from current levels. This could be the case if potential growth is higher than the Fed's estimate of 1.7-2.0% longer-run growth. With Powell repeating that the Fed expects housing rent to come down over time, small upside deviations in upcoming inflation data may be ignored by the Fed, as well. The market and Fed are likely to take a consensus 0.2% m/m print for the August PCE Deflator in stride.
The Fed's projection of Real GDP Growth of 1.8-2.3% over the next three years is in line with its estimate of the longer-run trend, which may be "solid" as Powell says but is not especially conducive to strong earnings growth. Like all long-term forecasts, though, these have to be taken with a grain of salt. They may be meant to justify continued monetary policy easing rather than be a realistic forecast.
Why the projected rate cuts shouldn't lead to a significant speedup in GDP growth is a question. Perhaps the Fed could justify it by saying the easing just offsets the lagged restraint of earlier tightening. Or, it's possible that bad fiscal policies in a new Administration could restrain growth at the same time monetary policy is lifting it. Arguably, the opposite happened in the past couple of years, with stimulative fiscal policy offsetting tighter monetary policy (although the Fed would never admit to this).
The dubious accuracy of these forecasts is apparent in the downward revision of the 2024 Real GDP forecast to 1.9-2.1% from 1.9-2.3% made in June. With H224 Real GDP Growth at 2.2% and the Atlanta Fed model estimate of Q324 Real GDP at 2.9%, there needs to be a sharp slowdown in September and Q424 to match the Fed's forecast for the year. Perhaps, a protracted Boeing strike will do the trick. There would be a sharp rebound in GDP once the strike ended, however.
The latest Unemployment Claims data argue against a late-summer slowdown. Initial and Continuing Claims fell further below the August levels in the latest week, despite the possibility of a post-holiday rebound. At this point, they suggest a speedup in September Payrolls (due October 4), which could dampen expectations of future Fed easing.
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