The Fed Pauses Amid Economic Uncertainty
Executive Summary
The S&P 500 finished the week down 0.05%, moving from optimism driven by positive economic data to caution in reaction to tariff news and heightened geopolitical tensions.
Federal Reserve Policy: The Federal Open Market Committee (FOMC) concluded its two-day meeting Wednesday, keeping the Fed Funds rate unchanged at 4.25%–4.50%. Fed Chair Jerome Powell stated the central bank is "well positioned to wait," amid growing tariff-related uncertainty. Revised Fed projections now show lower GDP growth (1.4%) and higher inflation (3.0%) for 2025, raising mild stagflation concerns.
Powell highlighted tariffs as an "unavoidable cost increase," likely driving notable inflation in the months ahead. The Fed remains focused on anchoring inflation expectations to prevent temporary tariff-driven price hikes from becoming persistent, creating a careful balance between inflation control and employment support.
Despite weaker economic forecasts, the median Fed projections continue to signal two quarter-point rate cuts in 2025, targeting a year-end rate of 3.9%. However, dissent has grown, with seven of nineteen officials now anticipating no cuts.
The Fed’s cautious stance reflects significant uncertainty tied to trade policy. By keeping future rate-cut plans intact while acknowledging economic headwinds, Powell maintained market stability, signaling potential easing beginning in September but stressing patience as tariff impacts develop.
Consumer Spending: Retail sales fell 0.9% month-over-month in May, the sharpest drop in four months, largely due to weaker auto, building materials, and gasoline purchases as pre-tariff buying momentum faded.
Labor Market: Initial unemployment claims dipped to 245,000, but the four-week average rose to 245,500—the highest level since August 2023—indicating gradual softening in the labor market. I previously identified the 250,000 level in the four-week average as a threshold where markets might take notice. When asked this week about the significance of that figure, I explained that there is no mathematical formula behind it; rather, it represents the level at which unemployment claims may begin to affect investor sentiment.
Housing Sector: Housing starts fell 9.8% to 1.256 million annualized, the slowest pace since early 2020. Homebuilder confidence dropped to 32, with 37% of builders cutting prices.
Manufacturing: Industrial production remained flat for the second consecutive month, while the Empire State Manufacturing Survey showed sharp contraction with the index falling to -16.0.
Inflation Outlook: Current inflation sits at 2.35% year-over-year for May, with Fed Chair Powell citing tariff-related cost pressures and Middle East energy risks as potential factors keeping near-term inflation above 3%.
The Data Tells a Story:
- The economy is slowing as GDP estimates continue to be revised downward.
- Corporate earnings estimates have consistently been revised lower over the past year.
- Inflation is expected to gradually rise as tariffs begin to influence prices.
- Conflict in the Middle East may increase energy prices, contributing further to inflation.
- An increase in initial unemployment claims suggests early signs of a softening labor market.
The Bottom Line: The economy is stable right now, but there are enough signs to warrant caution. While the economy has shown resilience, ongoing stressors—such as the war in Ukraine, the conflict between Israel and Iran, tensions between India and Pakistan, potential threats to Taiwan from China, and trade policy uncertainty—raise questions about how much additional pressure it can withstand.
Monday:
The New York Fed’s Empire State Manufacturing Survey recorded a sharp contraction, with the headline index falling to –16.0 from –9.2 in May—marking a fourth consecutive monthly decline. New orders and shipments weakened, and while cost pressures persist, they are beginning to show signs of easing. Employment rose for the first time since January, and business sentiment improved as the six‑month outlook turned positive, suggesting cautious optimism ahead.
Source: The Federal Reserve Bank of New York Empire State Manufacturing Survey
Tuesday:
Retail Sales cooled significantly in May, with total sales falling 0.9% month-over-month—the sharpest drop in four months. The decline was largely driven by weaker purchases of autos, building materials, and gasoline after a surge in pre-tariff buying earlier in the spring. Still, core retail sales (which exclude those volatile categories) edged up 0.4%, suggesting underlying consumer spending remains steady even as pre-tariff momentum fades. Analysts point out that this likely reflects consumers pulling forward major purchases ahead of expected tariffs, rather than a broader pullback in spending.
Source: Census Bureau Advance Monthly Report for Retail and Food Services,
Industrial Production was essentially flat in May for the second month in a row. Manufacturing saw a small 0.1% gain, thanks to a rebound in vehicle output. Mining edged up 0.1%, while utilities fell 2.9%, keeping total output stagnant. This confirms that the industrial sector remains in neutral as we head into summer.
Source: Federal Reserve G.17 Release — Industrial Production and Capacity Utilization
Homebuilder Confidence dropped to 32 in June, its lowest level since December 2022 and well below forecasts of 36. A record 37% of builders cut prices, and 62% offered sales incentives as high mortgage rates and economic uncertainty continued to dampen buyer interest. All three survey components—current conditions, future expectations, and buyer traffic—fell, signaling a softer housing outlook ahead.
Source: National Association of Home Builders / Wells Fargo Housing Market Index
Wednesday:
New Residential Construction
- Housing starts fell 9.8 percent in May to an annualized 1.256 million—the slowest pace since early 2020 and 4.6 percent below a year earlier, well under the 1.35 million consensus. A sharp drop in multifamily projects drove the decline, while single-family starts were roughly flat.
- Building permits, a forward-looking gauge, slipped 2.0 percent to 1.393 million, undershooting the 1.42 million forecast. The stock of homes that are permitted but not yet started continued to grow, signaling potential pent-up supply.
- Housing completions rose 5.4 percent to 1.526 million, adding near-term inventory that could ease some supply constraints.
- Analysts note that mortgage rates hovering near 7 percent, along with higher construction costs tied to tariffs, are likely to keep homebuilding subdued through the summer despite the current backlog of permitted projects.
Source: Census Bureau Monthly New Residential Construction
Initial Claims for Unemployment Insurance dipped by 5,000 to 245,000, while the four-week moving average rose to 245,500—the highest level since August 2023—indicating the labor market continues to gradually soften. Continuing claims eased by 6,000 to 1.945 million, staying above 1.9 million for a fourth straight week. The data suggest that, while layoffs are not rising, the pace of hiring has slowed, making it harder for unemployed workers to secure new positions.
Source: U.S. Department of Labor
The Federal Reserve’s Federal Open Market Committee (FOMC) concluded its two-day meeting, leaving the target range for the federal funds rate unchanged at 4.25%–4.50%. In his prepared statement, Fed Chair Jerome Powell cited “solid” economic growth, a low jobless rate, and inflation that remains “somewhat elevated.” Policymakers will continue to shrink the Fed’s balance sheet and reiterated their readiness to adjust policy if risks emerge.
At this meeting, the FOMC published projections for the future path of interest rates. In their new projections, the median participant sees two quarter-point cuts before year-end; however, seven of nineteen officials now anticipate no cuts—a notable shift that tempered market optimism. Chair Powell stressed that tariff-related cost pressures and Middle East energy risks could keep near-term inflation above 3 percent, warranting patience before easing..
Source: Board of Governors of the Federal Reserve System
Thursday:
National Holiday - Markets Closed
Friday:
No Economic Data Released
By The Numbers
Employment Indicators
Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.
| Indicator | Current Value | Status |
|---|---|---|
| Initial Claims for Unemployment | 245,000 | Caution |
| 4-Week Average of Initial Claims | 245,500 | Caution |
| Continuing Claims | 1.945M | Elevated |
| Unemployment Rate | 4.2% | Stable |
Note: Values above 250K for the 4-Week Average, combined with rising unemployment, would signal a weakening economy. Next unemployment report: July 3, 2025. Source: Department of Labor
Economic Growth (Real GDP)
| Period | Growth Rate | Status |
|---|---|---|
| Q3 2024 | 2.8% | Positive |
| Q4 2024 | 2.3% | Slowing |
| Q1 2025 | -0.2% | Contraction - Consider the average of Q1 & Q2 due to tariff distortions = 1.6% |
| Q2 2025 (est.) | 3.4% | Recovery - Consider the average of Q1 & Q2 due to tariff distortions = 1.6% |
GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Estimate from Federal Reserve Bank of Atlanta
Inflation Measures (CPI Year-over-Year)
| Month | Rate | Trend |
|---|---|---|
| July | 2.89% | Improving |
| August | 2.53% | Improving |
| September | 2.44% | Improving |
| October | 2.60% | Deteriorating |
| November | 2.75% | Deteriorating |
| December | 2.89% | Deteriorating |
| January 2025 | 3.00% | Deteriorating |
| February | 2.82% | Improving |
| March | 2.39% | Improving |
| April | 2.31% | Improving |
| May | 2.35% | Deteriorating |
| June (est.) | 2.62% | Deteriorating |
Source: Bureau of Labor Statistics; May estimate from Federal Reserve Bank of Cleveland
Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.
Interest Rate Outlook
Current Fed Funds Rate: 4.25-4.50%
| Expected Cut Date | Amount | Projected Rate After Cut |
|---|---|---|
| September 17, 2025 | 0.25% | 4.00-4.25% |
| December 10, 2025 | 0.25% | 3.75-4.00% |
| March 18, 2026 | 0.25% | 3.50-3.75% |
| June 17, 2026 | 0.25% | 3.25-3.50% |
| December 9, 2026 | 0.25% | 3.00-3.25%
|
Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool
Corporate Earnings Outlook (S&P 500 Estimates for 2025)
|
Date
|
2025 Earnings Estimate |
2026 Earnings Estimate
|
Trend
|
|---|---|---|---|
|
June 28, 2024
|
$276.29
|
|
|
|
Sept 30, 2024
|
$274.73
|
|
Deteriorating
|
|
Dec 31, 2024
|
$271.25
|
|
Deteriorating
|
|
Mar 31, 2025
|
$266.39
|
$304.89 |
Deteriorating
|
|
Current
|
$255.75
|
$296.02 |
Deteriorating
|
Source: S&P Dow Jones Indices
Market Valuation
Metric |
Value |
Assessment |
|---|---|---|
S&P 500 P/E ratio on forecasted earnings. |
22.29 |
Expensive |
Historical P/E (pre-1980) |
14.0 |
|
Historical P/E (post-1980) |
19.0 |
Note: Equity valuations remain expensive by historical standards
Disclosure:
This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.
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