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Fed Leaves Rates Unchanged Once Again, but Still Sees Two Cuts by the End of the Year

Among the biggest news of the week was the widely anticipated decision of the Federal Open Market Committee (FOMC) – the policymaking arm of the Federal Reserve – to hold the federal funds rate at a target range of 4.25%-4.5%, where it’s resided since December.

As has been the case with so many of these FOMC meetings of late, observers were less interested in the entirely expected rate decision, and more curious about the accompanying narrative – including the Fed’s updated Summary of Economic Projections – to get an idea of where policy may be headed.

According to the summary, committee members still are expecting two quarter-point rate reductions before 2025 comes to an end, perhaps a surprise to some who’ve noted the central bank’s reluctance to seriously entertain cuts until it’s satisfied tariff impacts are likely to be negligible.

One significant change that was made to the formal outlook is that Fed officials decreased the number of cuts anticipated in 2026 and 2027 from three to two in each year, implying we’ll see no more than a full percentage point reduction through the foreseeable future after 2025.

As for what’s in store for the rest of this year, while the summary suggests two rate reductions are still in the bullpen, investors should be mindful that’s in no way a done deal.

For one thing, the number of policymakers who said they favor no cuts this year is now at seven, up from the four who said so in March. And for another, Fed Chair Jerome Powell, during his post-meeting press conference, reiterated that the central bank will take as much time as it feels is necessary before deciding to make any material changes to policy, saying, in part:

“For the time being, we are well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policies.”

Retail Sales Tank a Worse-Than-Expected 0.9% Last Month

In other news, May retail sales figures disappointed even those who already were expecting sad-looking numbers heading into the week.

On Tuesday, the Commerce Department revealed that headline retail sales sank 0.9% last month, below the 0.6% decline projected by Dow Jones. Adding insult to injury, last month’s extra-disappointing result comes on the heels of a downwardly revised 0.1% drop in April.

Pull automobiles out of the equation, and sales still dropped, tumbling 0.3% instead of rising 0.1%, which is the number economists had anticipated.

Notably, sales of the control group, which excludes autos, gas, building materials and food services, rose 0.4% last month after falling 0.1% in April.

In his overall assessment of the May sales numbers, Michael Pearce, deputy chief economist at Oxford Economics, suggested, “There are few signs yet that tariffs are leading to a general pullback in consumer spending, but added:

“We expect a more marked slowdown to take hold in the second half of the year, as tariffs begin to weigh on real disposable incomes.”

Sentiment Among the Nation’s Homebuilders Is Getting Worse

Also this week, we were given a couple of updates on health of the nation’s housing market, neither of which seemed to inspire any confidence in the sector’s near-term prospects.

First up was the Housing Market Index for June, released on Tuesday by the National Association of Home Builders (NAHB).

According to the data, the index – which measures homebuilder sentiment on a scale of zero to 100 – declined two points this month to land at 32. Economists had expected the metric to come in at a modestly better 36.

Now far below the threshold level of 50 that distinguishes homebuilder pessimism from optimism, the index is, in fact, at its lowest value in 2½ years.

The association pointed to persistently uncooperative mortgage rates and equally persistent concerns about the economy’s near-term stability as principal factors in the feeble index reading. In a statement, NAHB chief economist Robert Dietz said, in part, “Given current market conditions, NAHB is forecasting a decline in single-family starts for 2025.”

Housing Starts in May Sink to Lowest Level in Five Years

Then on Wednesday, the Census Bureau effectively reiterated the NAHB’s dour outlook for housing when it revealed that new construction of privately owned units came in at a seasonally adjusted annual rate of 1.25 million last month. Not only is that below the 1.36 million projected by economists, but it’s also a sharp 9% drop from April’s 1.39 million starts. In fact, the May number is the lowest level for housing starts in five years.

It’s worth noting that the principal culprit of last month’s anemic overall numbers was a whopping 30% drop in starts of multifamily housing – duplexes, townhouses and apartment buildings, for example.

Indeed, the pace of new single-family home construction ticked up 0.4% on a monthly basis in May, to land at a seasonally adjusted rate of 924,000. Year over year, however, that number represents a decline of 7.3%. And single-family building permits, which are signs of future construction, sank 2.7% from April and 6.4% from May 2024.

With mortgage rates expected to remain elevated and tariffs on lumber, aluminum and steel in full effect, analysts see little reason to expect housing-start numbers to turn around anytime soon. In fact, said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets:

“We appear on course for a substantial decline in real activity in the current quarter and perhaps further weakness in the summer.”

May Leading Economic Index Adds to Growing “Slowdown” Narrative

Finally this week, The Conference Board reported on Friday that its widely followed Leading Economic Index (LEI) declined by 0.1% in May, to a measure of 99.0. The reading missed economists’ projections of an increase by 0.1% and follows a downwardly revised drop in April by 1.4%.

Of some concern to analysts are the broader trends demonstrated by the LEI in recent months amid other signs of a slowing economy. The May result represents the fifth straight month the index has dropped. Moreover, the index has declined by 2.7% over the previous six months (through May), a markedly faster pace than the 1.4% contraction that took place over the previous six months.

In a statement accompanying the release of the May reading, Justyna Zabinska-La Monica, senior manager of business cycle indicators, at The Conference Board, said, in part:

“With the substantial negatively revised drop in April and the further downtick in May, the six-month growth rate of the Index has become more negative, triggering the recession signal. The Conference Board does not anticipate recession, but we do expect a significant slowdown in economic growth in 2025 compared to 2024, with real GDP growing at 1.6% this year and persistent tariff effects potentially leading to further deceleration in 2026.”

That’s it for now; have a fantastic weekend!

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