Stocks managed to secure solid wins ahead of a critical monetary policy decision from the Federal Reserve, which has investors on edge over how aggressively the central bank will bring down interest rates.
The tech-heavy Nasdaq Composite (^IXIC) led markets higher to nab its best week of the year, up about 6%. That weekly best was echoed by the benchmark S&P 500 (^GSPC), which saw an uptick of 4% as both gauges notched their fifth straight day of gains on Friday. The Dow Jones Industrial Average (^DJI) also ended the week in the green, up around 3%.
The positive swings come as traders have flip-flopped on whether the Federal Reserve will cut rates by 25 basis points or opt for a more robust 50 basis point cut at the end of its two-day policy meeting on Wednesday. No matter the size, it will be the first rate cut from the Fed s
ince early 2020.
Former New York Fed president Bill Dudley said there's a "strong case" for a deeper cut as FOMC members attempt to maneuver a "soft landing" of the economy. That, along with reports from the Financial Times and the Wall Street Journal that suggested policymakers were struggling to come to a decision, have fueled expectations for a jumbo rate cut.
Outside of the Fed decision, investors will also be monitoring the health of the consumer, with retail sales for the month of August on the docket for Tuesday. The housing market will also be top of mind after mortgage rates dropped to their lowest level since February 2023.
A weekly update on jobless claims is also on the schedule, as well as activity checks from the manufacturing sector.
In corporate news, quarterly reports from FedEx (FDX), General Mills (GIS), Lennar Corporation (LEN), and Darden Restaurants (DRI) will headline the earnings calendar.The positive swings come as traders have flip-flopped on whether the Federal Reserve will cut rates by 25 basis points or opt for a more robust 50 basis point cut at the end of its two-day policy meeting on Wednesday. No matter the size, it will be the first rate cut from the Fed since early 2020.The Fed will announce its next monetary policy decision on Wednesday. Markets are largely split on whether the central bank will cut rates by 25 basis points to a range of 5.0% to 5.25% or by 50 basis points to a range of 4.75% to 5.0%.A closely watched report on US inflation showed consumer prices rose in August at the slowest pace in three years on an annual basis, according to the latest data from the Bureau of Labor Statistics released Wednesday morning.The index rose 0.2% over the previous month, matching both July's monthly increase and what economists had expected.Although it is moderating, inflation has remained above the Federal Reserve's 2% target on an annual basis. However, recent economic data, including a jobs report that indicated a weakening labor market, points to an all-but-certain rate cut by the end of the Fed's next policy meeting on Sept. 18.
"The time has come for policy to adjust," Fed Chair Jerome Powell said at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyo., last month.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
The question now is just how quickly the Fed will bring down rates.
"This isn’t the CPI report the market wanted to see," Seema Shah, chief global strategist at Principal Asset Management, wrote in reaction to the report. "With core inflation coming in higher than expected, the Fed’s path to a 50 basis point cut has become more complicated."
On a "core" basis, which strips out the more volatile costs of food and gas, prices in August climbed 0.3% over the prior month and 3.2% over last year. Core prices rose 0.2% month over month and 3.2% on an annual basis in July."The number is certainly not an obstacle to policy action next week, but the hawks on the committee will likely seize on today’s CPI report as evidence that the last mile of inflation needs to be handled with care and caution — a formidable reason to default to a 25 basis points reduction."
As of Tuesday, markets were pricing in a nearly 100% chance the Federal Reserve cuts interest rates by the end of its September meeting. However, following the data's release, the odds of a 25 basis point cut versus a 50 basis point cut were split 85/15 from a 56/44 split last week, per the CME FedWatch Tool.
But the Fed's decision won't all come down to inflation, as the US economy added fewer jobs than expected in August.
Read more: Cell phones, furniture, used cars: Here's where prices are easing up as inflation cooldown continues
The Consumer Price Index (CPI) increased 2.5% over the prior year in August, a deceleration compared to July's 2.9% annual gain in prices and the lowest annual rate since early 2021. The yearly increase was also in line with economist expectations.
Friday saw a significant jump in expectations for a 50 basis point cut, according to the CME FedWatch Tool. As of Friday afternoon, traders had placed a roughly 49% probability policymakers would commit to that larger rate cut, compared to just a 28% chance one day prior.
There's a case to be made for both. On the one hand, inflation has remained above the Federal Reserve's 2% target on an annual basis with hotter-than-expected readings on monthly "core" inflation suggesting the Fed should err on the side of caution and cut by just 25 basis points.
Former New York Fed president Bill Dudley said there's a "strong case" for a deeper cut as FOMC members attempt to maneuver a "soft landing" of the economy. That, along with reports from the Financial Times and the Wall Street Journal that suggested policymakers were struggling to come to a decision, have fueled expectations for a jumbo rate cut.
Outside of the Fed decision, investors will also be monitoring the health of the consumer, with retail sales for the month of August on the docket for Tuesday. The housing market will also be top of mind after mortgage rates dropped to their lowest level since February 2023.
A weekly update on jobless claims is also on the schedule, as well as activity checks from the manufacturing sector.
In corporate news, quarterly reports from FedEx (FDX), General Mills (GIS), Lennar Corporation (LEN), and Darden Restaurants (DRI) will headline the earnings calendar.
