7/18/25: Markets Anticipate Future Rate Cuts

Although the market was able to digest significant economic data releases during the past week, the visibility on the likely timing and pace of monetary policy normalization remains ambiguous. The Consumer Price Index (CPI) was released on Tuesday morning, with the headline month-over-month number coming in at consensus expectations of 0.3% for the month of June, however the core CPI number (excluding food and energy) was 0.1% better than expectations at 0.2%. Although on an aggregate basis the CPI headline and core number are trending in the right direction to be consistent with the Federal Reserve’s stable price’s objective, the overall impact of the tariff policy has not yet fully flowed through to the US economy. Goods that historically have a higher import component, notably household furnishings, appliances, and recreational goods, experienced a higher rate of inflation increase in the month of June, possibly foreshadowing the coming impact to inflation from the tariff policy. The Producer Price Index (PPI) was released on Wednesday morning, and both the headline and core numbers came in below expectations with 0.0 readings. Despite the low consumer and producer inflation numbers, market participants are forecasting that some of the underlying components of both the CPI and PPI indicate the core Personal Consumer Expenditures Index (PCE) will come in with a marginally higher month-over-month number than core CPI at the end of the month. The core PCE inflation number is the Federal Reserve’s preferred inflation metric, and the moderate divergence in trends could lead to monetary policy stagnation.

 Retail Sales and Jobless Claims were released on Thursday morning, with both numbers coming in better than consensus expectations. Retail Sales increased by 0.6% on the month compared to the 0.1% consensus forecast; the Retail Sales Control Group, which is more focused on goods consumption and feeds more directly into GDP calculations came in at 0.5% for the month, better than the 0.3% consensus estimate. Weekly Jobless Claims ticked down to 221k, below the prior week reading of 228k; notably, this week is the survey week for the payrolls report on August 1^st thus market participants will be less likely to materially mark down their payroll estimates for the month of July.

 The next Federal Reserve Open Market Committee (FOMC) meeting is on July 30^th and the probability of a drop in the policy target rate is quite low. The US consumer has remained resilient in the face of the tariff policy uncertainty and although the trends in the job market are deteriorating, the pace is moderate, allowing the FOMC to remain patient. Disparaging comments about Fed Chair Powell from President Trump continues to cause intraday market volatility, with news out of the White House this week that the process to formally identify a nominee for the next Fed Chair has begun. The Chandler team believes the nominee will be more formally indicated later in the year, likely in the fourth quarter of 2025, to help preserve the institutional integrity of the Federal Reserve.

On a week-over-week basis Treasury yields remained within the recent range with yields marginally lower since last Friday’s market close. Importantly, the two-year Treasury note continues to trade below 4.00%, which we believe is an important demarcation line confirming the next move by the Federal Reserve will be an easing of monetary policy. Federal Reserve policymakers are likely to be less unified going forward as markets approach a policy inflection point, with New York Fed President Williams stating the Fed’s restrictive policy stance is entirely appropriate. Highlighting a more dovish perspective, Fed Governor Waller is calling for the FOMC to cut rates to be pre-emptive in supporting the labor market and San Franciso Fed President Daly stating the Fed should be wary of waiting too long to cut rates. The Chandler team continues to call for a more accommodative monetary policy stance later in the year, with our base case calling for two cuts of twenty-five basis points each before the end of the year, bringing the Fed Funds target range to 3.75% to 4.00%.

Next week:  Leading Economic Indicators, Existing Home Sales, Chicago Fed National Activity Index, Jobless Claims, S&P Global US Manufacturing and Services PMIs, New Home Sales, and Durable Goods. 

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