The Federal Reserve rate decision

Although the Federal Reserve held rates steady, as widely expected by markets, diverging opinions are emerging on the appropriate path forward. While the committee approved the policy statement unanimously, seven of the 19 participants indicated they did not want any rate cuts this year, and the Fed dot plot shows fewer cuts in the coming years. On the other hand, Governor Waller gave an interview Friday morning stating he believes the Fed should start cutting as early as July to start the process of lowering rates. Governor Waller also stated he believes any tariff impacts should be viewed as a one-time price adjustment and not as persistent inflation. He noted the labor market has cooled significantly, and he does not believe wage pressure will be an inflation driver. Jobless claims over the past three weeks support this view, as we have now three consecutive weeks of claims at or above 245,000. While claims at this level are not an immediate cause for concern, they are trending higher and indicate a weakening labor market.

Other key news and releases

Other releases last week showed signs of a slowing economy. Both the Empire State Manufacturing index and Philadelphia Fed Manufacturing index came in below expectations. However, both showed a sharp decline in the prices-paid component, which was welcomed news. Retail sales declined by 0.9% on the month, a larger decline than expected. When excluding vehicles, retail sales declined 0.3%, still well below expectations. The housing market index was weak with a reading of 32. Housing starts and permits also missed expectations, pointing to continued sluggishness in the housing market as affordability continues to be a significant issue.

News surrounding the conflict between Iran and Israel continues to dominate headlines after the U.S. bombed Iran’s nuclear infrastructure on Saturday. As of now, the market response is muted and Israel announced they expect to end the conflict soon. However, that will depend upon any Iranian response to the recent bombings. Oil prices will be closely watched as elevated oil prices have the potential to upend the progress made on inflation over the past few months. Finally, the Senate released its version of the proposed tax and spending bill, and there are some stark differences between the Senate and the House versions. These differences will undoubtedly be negotiated over the coming weeks, and the July 4 self-imposed deadline is likely to get pushed out, leaving the markets waiting for further clarity on U.S. fiscal policy.

The week ahead

Manufacturing and Services PMIs, durable goods, and the closely watched PCE index will be released this week.