All eyes this week were on the Federal Reserve's September meeting. As expected, the Fed cut the federal funds rate by 25-basis points to a range of 4.00 percent to 4.25 percent, and signaled two more cuts by year-end, bringing the policy path into clearer focus. However, Fed Chair Jerome Powell’s post-meeting remarks struck a more cautious tone, reminding markets that inflation remains a persistent threat. This pushback against overly dovish expectations caused bond markets to reverse course, with yields rising as traders reconsidered the pace of future rate cuts. Despite the easing, Powell emphasized that it would take larger rate shifts to meaningfully impact housing, especially given today's nationwide housing shortage.
On the data front, jobless claims dropped sharply, undoing the previous week’s spike and signaling labor market resilience, while strong retail sales and rising import/export prices in August pointed to robust consumer demand and lingering inflationary pressures. Industrial production ticked up modestly, led by auto manufacturing, but capacity utilization remained soft. But just how quickly is the economy cooling? How is the Fed’s approach to cutting rates going to impact changes in data moving forward? Mortgage rates fell to new 2025 lows, with Freddie Mac reporting 30- and 15-year fixed rates at 6.26 percent and 5.41 percent, respectively, prompting a nearly 30 percent jump in mortgage applications.
Investor sentiment, however, took a hit midweek following a disappointing $19 billion 10-year TIPS auction, which tailed significantly and showed weaker-than-expected demand for inflation protection despite real yields hovering near their lowest levels in a year. The result underscored the uncertainty around the Fed's next moves and the broader inflation outlook. Meanwhile, long-term expectations are coalescing around a federal funds rate settling near the neutral level (estimated around 3 percent) by the end of 2026, barring any major inflationary or geopolitical disruptions.
On the political front, the Fed’s internal dynamics and independence came under fresh scrutiny. Newly confirmed Governor Stephen Miran dissented from the committee’s consensus, favoring a more aggressive 50-basis point cut. His concurrent role in the White House drew criticism, as it could signal mounting political influence over the central bank. Reports also emerged that the Treasury is beginning to vet potential successors to Fed Chair Powell, including former Fed officials and economic advisors, raising questions about how leadership changes might impact the direction of monetary policy in 2026 and beyond.
Housing data this week revealed further signs of weakness, with August housing starts falling 8.5 percent and building permits down 3.7 percent, pointing to ongoing supply constraints in residential construction. Despite softer housing indicators, the significant drop in mortgage rates gave borrowers a reprieve, helping to spark renewed activity in the purchase and refinance markets. Still, the broader economic picture remains nuanced, supported by strong consumer data on the surface, but with underlying vulnerabilities in housing, production, and labor force dynamics that could shape how the Fed proceeds through its easing cycle.