Markets pick up modest gains as Fed stays put

MANHATTAN (CN) — Fresh inflationary data, coupled with comments from the Federal Reserve, helped Wall Street pull out another largely positive week.

The Dow Jones Industrial Average began to shed points slowly early in the week, finishing the week down 209 points by Friday’s closing bell. However, the S&P 500 and Nasdaq both set new high points and ended the week’s trading up by 85 points and 555 points, respectively.

The Federal Reserve, which met on Tuesday and Wednesday, again chose not to move the federal funds interest rate from its current 5.25% to 5.5% range. The central bank did, however, forecast one rate hike of 25 basis points this year.

Assuaging wary investors, Fed Chair Jerome Powell said that nobody on the central bank’s committee has rate hikes as their base case going forward. He also said inflation reports from the week have continued building confidence for rate-cutting later this year.

“I think the evidence is pretty clear that policy is restrictive and is having, you know, the effects that we would hope for,” Powell said during a press conference after the meeting. The Fed will meet three more times this year.

The Fed's GDP or gross domestic product expectations were also unchanged, with the median expectation among Fed voting members coming in at 2.1% GDP this year, followed by 2% in 2025 and 2026.  

“The Fed will still require a couple more months of low inflation prints to have confidence that inflation is moving sustainably back to target,” wrote Bernard Yaros, lead U.S. economist at Oxford Economics. “We think this is likely, with residual seasonality behind us, the labor market in better balance, deflation in certain key goods prices, and housing inflation potentially due to a switch to a lower gear.”

Also on Wednesday, investors received a nice surprise in the form of the consumer price index.

With that new data, the U.S. Bureau of Labor Statistics showed that consumer prices remained unchanged in May, below expert forecasts. Over the last 12 months, the CPI has increased by 3.3%.  

Across specific sectors, energy saw the biggest drop, with gasoline declining 3.6% and all energy falling by 2%. Food prices gained by just 0.1%, while shelter — which often follows behind most other indicators of inflation — increased by 0.4%.

In an investor's note, Yaros wrote that the CPI reading indicates the first rate cut will come in September, followed by another in December. He also noted shelter prices are now among the most closely watched indicators of inflation.

“We are confident that the CPI for rent of shelter will eventually downshift, given the rise in rental vacancy rates," he wrote. Still, "the timing is still uncertain."

The agency’s corresponding producer price index, released on Thursday, showed prices declined 0.2% last month.

The core PPI, which excludes food and energy, remained unchanged in May. On an annualized basis, prices paid to domestic manufacturers increased by 2.2%, close to the pre-pandemic trend.

“Right on cue, disinflation is in the pipeline,” said Jamie Cox after the PPI was released. If "this keeps up, September will be live [for interest rate cuts].”

Sentiments from consumers and businesses also indicate that the time is nearly ripe for interest rate cuts.

The National Federation of Independent Business’s latest optimism index increased for the second month in a row, hitting its highest point of the year. “Small business owners need relief as inflation has not eased much on Main Street,” Bill Dunkelberg, the group’s chief economist, said in a statement.

On Friday, the University of Michigan’s preliminary consumer sentiment survey showed confidence is still dropping among consumers, with the index falling to 65.6 — its lowest point since late 2022. But even that should help buttress the calls for interest rate cuts.

“The Fed should find themselves in a fortunate spot to ease interest rates later this year before something breaks in the economy,” said LPL Chief Economist Jeffrey Roach.

Follow @NickRummell

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