Following yesterday's cooler-than-expected PPI and today's as-expected CPI, expectations are that the FOMC will cut the federal funds rate by 25 basis points on September 17, with no dissenting votes among voting members. Following today's jump in last week's initial unemployment claims, meeting participants might consider a 50-basis-point cut, but we doubt that they will opt for that, as the majority would likely dissent. Instead, the committee might signal the likelihood of more rate cuts in its Summary of Economic Projections.
Speaking of projections: We are raising our year-end S&P 500 target from 6600 to 6800. That’s our base-case scenario with a subjective probability of 55%. We currently assign a 25% subjective probability to a meltup that lifts the S&P 500 to 7000 by year-end 2025 and 20% odds to a correction in the index by the end of this year. If the Fed lowers the federal funds rate on September 17 and signals more rate cuts ahead, we will increase our odds of a meltup and decrease our odds of a correction.
We are still not convinced that the economy needs to be stimulated by the Fed. Inflation remains closer to 3.0% y/y than to the Fed's 2.0 target. Real GDP is growing solidly despite the recent downward revisions in payroll employment. The unemployment rate remains between 4.0% and 4.3%. All this implies that either real GDP will weaken significantly and the jobless rate soon will rise sharply, or that productivity growth is making a strong comeback. We pick Door #2!
Consider the following:
