The Fed takes out some insurance

After a nine-month pause, the Federal Reserve lowered its target interest rate by 25 basis points last week in a move Chair Jerome Powell categorized as a “risk management cut.” The market initially struggled to interpret this description: longer dated yields bounced around but ultimately finished the week higher.

Leading up to the meeting, the Fed had to contend with conflicting data signals of weaker employment yet stronger inflation. While the cut suggests policymakers have more concern about the labor market, Powell highlighted in his press conference that risks exist on both sides of the dual mandate. Notably, while many companies have absorbed the tariff burden with limited pass-through of costs to consumers, he expects this to change over time.

The Summary of Economic Projections (SEP) showed the likelihood of two more rate cuts in 2025, followed by one each in 2026 and 2027. As for the economy, the median forecast has 2026 GDP growth at 1.8%, the unemployment rate at 4.4%, and the rate of inflation still above target at 2.6%.

Other items last week included a robust retail sales report, which beat expectations and was led by strength in e-commerce, clothing and sporting goods. While back-to-school shopping may have played a role, consumer spending appears resilient on its own.