Rate Cut Seen, Projections Awaited as Fed Looms

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

0:17I'm Keith Lansford, and here is Schwab's early look at the markets for Wednesday, September 17th. There's little chance of a surprise at today's Federal Open Market Committee meeting, as the market overwhelmingly anticipates a 25 basis point rate cut. Along with that, investors get an update on the Federal Reserve's projections for the economy and rates, along with words from Fed Chairman Jerome Powell at his post-meeting press conference. The market approaches this keystone event near record highs despite a slight slip Tuesday, propelled by hopes for more rate cuts and signs of economic resilience.

0:55As of market close Tuesday, futures trading built in 96 % odds of a 25 basis point rate cut and 4 % odds of a 50 basis point rate cut when policymakers emerge at 2 p.m. Eastern Time, according to the CME FedWatch tool. Tuesday's solid retail sales report, along with a 0.3 % monthly increase in August import prices, likely scotched remaining hopes of a 50 basis point trim. Though the central bank might tilt more toward jobs after the last few months of labor market retreat, it's also not eager to let inflation heat up. Depending on the data rate cuts could be a meeting-by-meeting decision, but investors put heavy odds on two more cuts after this one before 2025 winds down.

1:42A 50 basis point cut seems unlikely, but not completely out of the realm of possibility, said Michael Townsend, Managing Director of Legislative and Regulatory Affairs at Schwab. Powell's press conference will be closely watched by investors and the markets to see what he signals in terms of further rate cuts before the end of the year, as well as his comments on Fed independence amidst the chaos of the last couple of weeks. New Fed Governor Stephen Myron will participate in the meeting after getting Senate confirmation Monday, while Fed Governor Lisa Cook also has a vote. An appeals court stopped President Trump's attempt to remove Cook from the Fed.

2:24Though the anticipated rate cut, the first since last December likely dominates headlines later today, the Fed's economic and rate projections carry weight as well. This time more than usual, considering the difficult position the central bank finds itself in thanks to sticky inflation combined with softer jobs growth. The projections include inflation, economic growth, and unemployment. One key element could be where policymakers see rates trending between now and the end of 2026. The last projections in June pegged rates by then at 3.6%, up from 3.4 % in March. That implies just a couple of cuts between now and then.

3:07However, the Treasury market anticipates much lower rates by the end of next year, with futures trading indicating the highest odds of between 2.75 % and 3.25%. This implies five or six rate cuts between now and late 2026. The question is who moves to match the other and how quickly. If inflation and economic growth remain untouched by falling employment in coming months, the Treasury market might start gradually pulling back from some of those expected rate cuts, possibly a headwind for the stock market. If today's projections and Fed Chairman Jerome Powell's remarks convey a dovish or accommodative stance, This could provide additional fuel for rate-sensitive areas like the small-cap Russell 2000 index, along with housing, financials, and real estate.

3:56Lower rates over time might also be a boost for dividend stocks if investors flee fixed income to chase higher yields elsewhere. Revisiting yesterday's data, U.S. shoppers kept loading their carts last month, even as economic indicators sag. Retail sales rose 0.6 % in August, well above the 0.3 % analyst estimate, and major indexes kept their pre-market gains after the data. Consumer demand has generally held up despite a softer labor market, said Colin Martin, director of fixed income strategy at the Schwab Center for Financial Research. The Fed will still likely cut rates tomorrow, but a resilient economy and above-target inflation may prevent the Fed from cutting as much as the markets are expecting over the next few quarters.

4:43Last month's solid retail sales kept their positive pace after an upwardly revised 0.6 % increase in July. Removing automobiles, August's headline was 0.7%. This kind of data might clash with other numbers from last month, especially slower jobs growth. But some corporate executives have recently said they see a growing dichotomy between consumers at the high end and low end of the income scale, meaning big spending from the wealthy may mask many less wealthy people cutting back. The retail sales report suggests that consumers continue to consume, Martin said. Tariffs don't appear to be slowing down purchases, as most segments of the retail sales report showed monthly increases.

5:28Burrowing into the report, the so-called control group retail sales number, which excludes sales from auto dealers, building materials stores, and gas stations, rose 0.7 % in August after climbing 0.5 % in July, which Martin said represents more proof of the resilient economy and suggests that third-quarter gross domestic product, or GDP, should remain at or near trend growth. Strong retail sales could bring some so-called bear steepening, where long treasury yields climb more than the shorter-term ones. This could also potentially help cyclical sectors like consumer discretionary and financials.

6:07When longer-term rates rise versus shorter ones, it tends to improve profits for banks since they borrow in the short-term and lend for the long-term. That appeared to be the case at least yesterday as the two-year yield fell two basis points while the 10-year yield was unchanged at 4.03%. Investors should keep an eye on the yield curve later today after the Fed meets and Powell speaks. Though retail sales were strong, the U.S. manufacturing economy continues to stall. Industrial production rose just 0.1 % in August, following a downwardly revised 0.4 % decline in July. Elsewhere Tuesday, a 20-year bond auction found SolidDemandBriefing.com reported.

6:51Other central banks also meet in coming days, including the Bank of Japan on Friday. The Bank of Canada is expected to cut rates on Wednesday, while the Bank of England and Bank of Japan are expected to be on hold, said Michelle Gibley, director of international research at the Schwab Center for Financial Research. Looking out to the next 12 months, markets are expecting the Fed to outpace the other major central banks, delivering the biggest cut in rates. This could keep downward pressure on the dollar, and dollar weakness adds to international returns. Also overseas, U.S. trade with China remains in headlines amid talks between the two countries that ended Monday in a framework agreement on social media platform TikTok.

7:34Oracle rose 2 % on CNBC's report that it could be among the firms enabling TikTok to keep operating in the U.S. In trading yesterday, most S &P 500 sectors clustered around unchanged, with five of 11 higher, led by energy and consumer discretionary after the strong retail sales report. Utilities had the worst day, possibly hurt by ideas that strengthen economic data like retail sales might prop long-term rates, posing competition for dividends. Real estate also fell on rate worries. Energy got a lift from crude oil, which tends to rise when U.S. rates fall. Falling rates often weaken the dollar, and crude is priced in greenbacks.

8:18Tesla kept up its sizzling pace with a nearly 3 % rise Tuesday. Other recent high flyers, however, took a breather amid possible position squaring ahead of the Fed and Friday's quarterly triple-witching in the options market, which can bring volatility. Stocks like UnitedHealth, Warner Brothers Discovery, CoreWeave, NVIDIA, and major banks struggled Tuesday.

8:44The Dow Jones Industrial Average fell 125.55 points Tuesday, or 0.27%, to 45 ,757.90. The S &P 500 Index gave back 8.52 points, or 0.13%, to 6 ,606.76. And the Nasdaq Composite edged 14.79 points lower, or 0.07%, to 22 ,333.96. This has been the Schwab Market Update podcast. To stay informed, visit www.schwab.com slash market update or follow us for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or a review. It really helps new listeners find the show. Join us for another update tomorrow.

9:43For important disclosures, see the show notes and schwab.com slash market update podcast.