February 19, 2025

Is the Fed Behind the Curve? Key Market Catalysts to Watch Now

This week, all eyes are on the Federal Reserve as it prepares to deliver its latest interest rate decision, a move that could set the tone for markets heading into the final stretch of the year. Investors are anxious to see whether the Fed will maintain its hawkish stance in the face of persistent inflation or signal a pivot towards a more dovish outlook amid signs of a cooling economy. With Wall Street on edge, the upcoming announcement will be critical in shaping market sentiment, potentially driving volatility across equities, bonds, and currencies. Here’s what traders need to know to navigate the days ahead.

Stocks rallied last week ahead of a pivotal monetary policy decision from the Federal Reserve, with investors anxiously weighing the central bank’s next move on interest rates. The tech-driven Nasdaq Composite (^IXIC) led the charge, climbing 6% for its strongest week of the year. Meanwhile, the S&P 500 (^GSPC) posted a solid 4% gain, and the Dow Jones Industrial Average (^DJI) advanced 3%, each notching their fifth consecutive day of gains by Friday.

These gains come amid shifting sentiment on Wall Street regarding whether the Fed will opt for a modest 25 basis point rate cut or a more aggressive 50 basis point reduction at the conclusion of its two-day policy meeting on Wednesday. Either way, this would mark the first rate cut by the Fed since early 2020.

Fed’s Decision: A Market Catalyst

Speculation over the Fed’s decision has created a dynamic environment for traders. Former New York Fed President Bill Dudley recently suggested there is a “strong case” for a deeper cut as Federal Open Market Committee (FOMC) members aim for a “soft landing” for the economy. Reports from both the Financial Times and The Wall Street Journal indicating a struggle among policymakers to reach a consensus have only fueled expectations for a larger rate cut.

However, uncertainty remains palpable. The CME FedWatch Tool showed that by Friday, traders had assigned a roughly 49% probability to a 50 basis point cut—up sharply from 28% the day before. Meanwhile, the Fed’s updated economic projections, including its “dot plot” of future interest rate expectations, will provide further insight into the central bank’s thinking.

JPMorgan economist Michael Feroli has argued for a larger cut, stating, “We believe what the Fed should do next week is clear: recalibrate the policy rate 50bp lower to adjust for the shifting balance of risks.” Feroli remains optimistic that the Fed will opt for the larger cut, although he acknowledges the uncertainty surrounding the decision.

Economic Indicators to Watch

While the Fed’s rate decision will be the week’s main event, investors will also be closely monitoring key economic indicators. Retail sales data for August, set to be released on Tuesday, will provide insight into consumer spending trends. Economists expect a 0.2% decline in retail sales, down from a 1% increase in July, which would mark a notable deceleration. Stripping out volatile components like gas and autos, sales are forecasted to rise by 0.3%.

On the housing front, lower mortgage rates—the lowest since February 2023—will be of interest, particularly given expectations for building permits and housing starts to rebound in August. Additionally, Thursday’s weekly jobless claims will offer more clues on the state of the labor market, which has shown signs of softening.

Corporate Earnings: FedEx and Others in Focus

Corporate earnings will also play a significant role in market movements this week. Notable reports include FedEx (FDX), General Mills (GIS), Lennar Corporation (LEN), and Darden Restaurants (DRI). FedEx, in particular, will be closely watched as its results are often viewed as a barometer for the broader U.S. economy.

FedEx’s performance will provide a window into global shipping trends and consumer demand, both of which are critical for gauging the strength of economic activity. With forecasts suggesting earnings could be under pressure, investors will be looking for management’s outlook to assess potential risks and opportunities ahead.

Looking Ahead: Fed’s Future Moves and Market Impact

The Fed’s policy announcement on Wednesday, along with the updated Summary of Economic Projections (SEP), will offer crucial guidance on the trajectory of U.S. interest rates. In June, Fed officials anticipated the fed funds rate to peak at 5.1% in 2024, implying only a modest rate reduction this year. However, market pricing now suggests 100 basis points of cuts through the end of 2024, reflecting the shift in economic outlook.

Should the Fed decide on a 50 basis point cut, Fed Chair Jerome Powell’s subsequent press conference will be closely scrutinized for hints on future policy direction. As Michael Feroli noted, Powell’s challenge will be to clarify whether the move is aimed at sustaining economic growth amid low inflation or if further easing is on the table should labor market conditions deteriorate.

Key Takeaways for Traders: Prepare for Market Volatility

With the Fed’s decision looming and multiple economic reports on deck, traders should brace for potential volatility. A deeper rate cut might provide immediate upside for equity markets, particularly growth stocks, but could also signal concerns about underlying economic weakness. Conversely, a smaller cut could disappoint those hoping for more aggressive monetary easing, leading to short-term market turbulence.

Additionally, data on retail sales, housing, and jobless claims will offer important clues about consumer resilience and economic momentum, providing further catalysts for market moves. Corporate earnings, especially from FedEx, will serve as another critical indicator of economic health.

Conclusion: High Stakes Week for Investors

Investors should keep a close eye on the Fed’s next move and the subsequent market reaction. While the central bank’s decision is likely to dominate headlines, the broader economic picture, as reflected in consumer spending, housing activity, and corporate earnings, will also shape market sentiment in the days to come.

 

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