The Fed’s rate decision will shake the markets this week

Economists, traders, politicians and financial journalists have been waiting seemingly forever for the Federal Reserve to start cutting US interest rates.

In fact, it has been 14 months since July 2023, when the Fed last raised its key federal funds rate to 5.25% to 5.5%.

More importantly, it has been 54 months since March 2020 since the Fed actually cut rates. Then the Covid-19 pandemic hit and basically shut down all activity, and the Fed wanted to make sure the US economy didn’t come to a complete halt.

A rate cut is likely on Wednesday at the end of a two-day meeting of the Fed’s Federal Open Market Committee. There are other events coming up this week, including some important economic and earnings reports.

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Wall Street is divided over the size of the rate cut

Futures trading suggests half of traders are seeing a cut of a quarter of a percentage point to 5% to 5.25%. The other half of Wall Street believes — and supports — a half percentage cut to 4.75% to 5.25%.

But the rate decision, to be announced at 2pm on Wednesday, can move stocks sharply. If the announcement doesn’t happen, two other events might:

• Fed Chairman Jerome Powell’s press conference, which is expected to begin around 2:30 PM on Wednesday. Powell often surprises traders with a point that is not in the ad. One key point to look for: guidance on how many more rate cuts are coming.
• Launching the dot-plot diagram. This is basically a series of guesses by Fed officials about where the economy, inflation and interest rates are headed over the balance of the year and for the next few two or three years. Which traders will want to know if how many officials see rates falling and by how much.

While the dot plot is really just an educated guess representation, investors pay close attention to it as a sort of road map of what’s to come.

It should be noted, as The Street’s Martin Baccardax did this week, that the Fed has been slow to cut interest rates, just as it has been slow to launch a strong anti-inflation campaign.

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The economy may gain some strength after the Fed’s decision for three reasons:

• Oil prices are falling.
• U.S. gasoline prices nationwide will almost certainly fall below $3 a gallon nationwide by mid-October. As of Saturday, the AAA national daily average was $3.217 per gallon, up just 3.2 percent from a year earlier and down 16.7 percent from a year ago. The price of AAA is down 3.7% so far in September.
• Mortgage rates are now just over 6% and could make buying a home a bit more affordable if prices don’t explode. At 7.5% (the rate as of the end of April), a principal and interest payment on a $250,000 mortgage was $1,748. At 6.1%, the payment is $1,521, down 13%.

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Techniques are coming back

Much of this year’s stock market gains reflect investors’ bets on falling rates. The S&P 500 is up 18% for the year as of Friday. So the consequences might not be so spectacular. At least not immediately.

Indeed, the S&P 500 rose 4% in the week just ended, the index’s best week since the first week of November. The Nasdaq Composite rose 5.8% this week, also its best week since the first week of November.

A week ago, tech stocks were lagging the broader stock market. Not this week.

Among the week’s big winners:

• Chip designer Arm Holdings (ARM) up 25.7%.
• Chip giant Nvidia (NVDA) up 15.8%.
• Big data company Palantir (PLTR) up 17.3%.
• Database giant Oracle (ORCL) up 14.3%.

Three economic reports will attract attention

• The first is the August retail sales report, due Tuesday before the market opens. Many analysts are anticipating a decline, compared to a decent number for July
• The Home Builders Trust, from the National Association of Home Builders. It was decidedly weak in August with low demand forcing many builders to cut prices. The main issue has been mortgage rates and how low rates must drop before buyers are willing to consider buying. Most analysts believe that demand will increase when mortgage rates fall below 6%.
• Homes started, from the Department of Commerce. The forecast is for a start rate of 1.4 million units unchanged from July.

Darden Restaurants, the parent of the Olive Garden restaurant chain, reports earnings this week.

UCG/Getty Images

Earnings reports to watch

Among the last second quarter earnings reports will come this week. The most important are probably:

• FedEx package shipper (FDX) drops on thursday The consensus estimate if earnings of $4.87 per share, up from $4.55 a year ago. Revenue is projected at $22 billion, up 1.4 percent from a year ago. FedEx is a reasonable proxy for the economy.
• Lennar Home Builder (LEN) . Earnings projection is $3.63, down slightly from $3.87 a year ago. Revenue is projected at $9.2 billion, up 8.4% year over year. Lennar is among the largest homebuilders, whose size allows them to work with lenders to make sales work. Lennar sells to a lot of buyers at different price levels.
• Darden Restaurants (DRI) the world’s largest operator of full-service restaurants. Holdings include Ruth’s Chris Steak House, Capital Grille, Olive Garden, LongHorn Steakhouse and Cheddar’s Scratch Kitchen. The stock fell 2.5 percent in 2024. The company said it saw much more caution from its lower-income consumers. Same-store sales have remained flat for several quarters. For the first quarter, the Street’s revenue estimate is $1.84, up from $1.78 a year ago. Revenue is expected to reach $2.8 billion, up 3.7%.

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