The Fed decision
Today brings the Fed interest rate decision, and the likely outcome is a rate hike, unless Fed chair Kevin Warsh goes his own way. The first open question is the vote count: will it be 5-4 to raise rates, or 5-4 to keep rates flat? Either result makes the press conference must-watch, because Warsh will have to explain the move.
Wall Street now prices in four rate hikes. A year and a half to two years ago it was pricing in seven. The market gets it wrong often, so the four-hike view carries the same doubt.
What's clear: wages and core CPI are coming down, mortgage rates now sit at 7.22%, and the housing market is frozen.
Q: If he does not raise rates today, what happens to the stock market? A: It depends entirely on how he explains it. The market whips around but usually does not truly move until the press conference, when Warsh starts talking about what the Fed did. A volatile day is possible.
When interviewing for the Fed, Warsh said he favored Main Street over Wall Street. Today tests that, because Main Street - housing, small businesses, consumers - is not doing as well as Wall Street. Warsh holds one vote. A Summary of Economic Projections (SEP) also comes out. Some officials lean hawkish, some sit in the middle. Michelle Bowman is an unknown. Waller may accept a pause, and Jefferson and Williams might back a hold if Warsh argues for waiting until October to see more data. The fear of inflation rising again is still strong.
The AI safety debate
Dario Amodei started the current round of AI fear. Others joined him, and others pushed back. Mark Zuckerberg has now spoken. He lines up with Nvidia (NVDA) chief Jensen Huang: AI should not slow down. His argument is that market forces and liability give companies enough natural reason to handle safety on their own. That holds some truth - if a company did something that harmed the US economy, the country, or humanity, it would face liability and consequences.
The other side: Zuckerberg gains from any slowdown at his competitors. Meta/Facebook (META) is not slowing down; it is full steam ahead. So while he agrees with Huang, he benefits either way. Sam Altman's OpenAI takes a different tone, saying the AI race against China does not give anyone the right to be reckless. Tech has been volatile, with clear winners and losers.
Retail sales beat
Retail sales came in stronger than expected, and Warsh saw the numbers this morning. The employed US consumer keeps showing up. Headline retail sales rose 1.2% month over month - this compares to the prior month, not year over year. A couple of months ago there was a big number, last month dropped from it, and now the figure snaps back to 1.2%. Excluding vehicles, sales rose 1.4%, almost a full percentage point above expectations. Excluding vehicles and gas, sales rose 1.2%, eight-tenths better than expected. Strong across the board.
The housing problem
Mortgage applications show the damage from high rates. The composite fell 4.1%, purchases fell 0.8% and are down 19% year over year. The mortgage rate rose from 6.97% to 7.22%. Refinances dropped 8.8% and are down 65% year over year. These are very poor housing numbers, and that high mortgage rate is exactly the kind of Main Street pressure Warsh will weigh.
