The economy is expanding, consumer spending and consumer confidence are strong, job growth is respectable, layoffs are low, and the Federal Reserve just cut the fed funds rate by a ¼% to 2.00-2.25% – see Figure 1.
It was a well-telegraphed rate cut. Only the magnitude of the cut was in question.
The Fed will announce its rate decision on Wednesday.
- A rate cut is virtually assured.
- Most observers anticipate a 0.25 percentage-point cut in the fed funds rate to 2.00-2.25%. A few see 0.50 percentage points.
A reduction of ¼% will likely have little impact on investors as it’s priced in. How the Fed frames its outlook is in view.
The U.S. Bureau of Economic Analysis reported that Gross Domestic Product (GDP), the largest measure of U.S. economic activity, slowed from Q1’s annualized pace of 3.1% to a still-respectable 2.1% in the second quarter.
The first peek at Gross Domestic Product (GDP) on Friday will likely show a moderation in activity vs Q1.
- Q1 posted a 3.1% annualized pace vs a forecast of 1.9% in Q2 (Econoday).
Yet, headline numbers can be misleading.
In Q1, soft consumer and business spending was offset by swelling business inventories and a surge in exports, which have been whipsawed by trade tensions.
Consumer spending rebounded in Q2, but exports have turned lower. Therefore, Q2’s headline may not reflect a firmer underlying economic tone.