Fed Watch – 5/9/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hi, I’m Brian Beaulieu. Welcome to the May 9th edition of Fed Watch.

The news from my perspective was good in that there’s nothing terrible to report about the economy. In fact, it’s pretty easy going through the latest data, why the Fed didn’t lower interest rates, probably to the chagrin of many people, but we’d rather have lower interest rates and the economy overheating eventually or not needing the lower interest rates. We’d rather just hear about how the economy is continuing to really do relatively well.

There was one indicator that was weak in April. That was our own ITR financial meeting indicator, that has more to do with the stock market woes that were going on in April than it does the broader economy. I took a look also at the stock market and its potential impact on retail sales, et cetera. There’s no direct linkage. I’m pretty good at spotting trend relationships and the weakness in this stock market in April could tie into weakness in existing home sales, makes people stop, hesitate, but all the other talk about the consumer just walking into a cave and doing nothing isn’t born out. The latest Redbook data, which was for the end of April, its weekly data, showed a 6.2% increase in retail sales activity across the board.

The latest weekly economic indicator from the Dallas Fed shows consistent growth in the economy. Automobile retail sales, and that data is a little older, that’s March, but that did very well in March because people were front running. those tariff increases or the anticipated tariff increases. That sector did quite well, except for Tesla. Tesla was down 1% year over year, down 8% the latest 12 months, but those are largely self-inflicted wounds. When automobile numbers looked like this, the Fed isn’t incentivized to lower interest rates. Redbook, WEI data, they’re not jonesing to lower interest rates based on any of that.

Wholesale trade, again, it was March data, but it was holding up really well through March. It tends to be a resilient part of the economy, but it’s running above year-ago levels. The 12/12 rate-of-change at 3.9% is in phase B. Durables are continuing to run stronger than non-durables, that’s to be expected right now as we get more into staple goods. You can see that in the stock market, the staple goods side of the market is doing better than easily consumed goods. But again, when you look at that wholesale data, and that came out in the past week, the Fed’s going to look at that and say, there’s no need to jump down this rabbit hole toward lower interest rates.

In fact, I’m going to read a little bit here from the Fed’s release following the FOMC meeting. “Although swings and net exports have affected the data,” and what you and I have talked about that, “recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions,” that’s the April jobs data that we talked about last week, “remain solid. Inflation remains somewhat elevated,” but the key there is that they use “somewhat”, and they’re not terribly worried about it at the moment. So no big deal, no wonder that it didn’t lower interest rates.

It seems to be all over the map. I was listening to another economist, something I rarely do, but I was forced to about circumstances, and this other economist firm was saying interest rates are going to be flat in 2025 out of the Federal Reserve, but the Fed is likely to reduce interest rates seven times in 2026. Normally, I don’t talk about what other economists are thinking, but it occurred to me, wow, what a baffling array of opinions and noise that’s going on out there. But we continue to see the economy slowly getting better in 2025, gaining some momentum in 2026. And we think 2025 is probably the most top. to see some reduction in interest rates by the Federal Reserve, but I wouldn’t hold out a whole lot of hope for that. Best plan on catching some lower interest rates when the market gets pessimistic.

Recently, the market hasn’t been pessimistic. For the last week, as a matter of fact, the 30-year fixed rate mortgage edged up a little bit. It’s still below seven. It’s at 6.76%. Look, we’ve been spending the vast majority of the last 12 months in the 6-7% range, so that’s really a non-news item. It is what it is. The 10-year U.S. government bond yield is at 4.353%. It’s been rising in May, but it’s still below the long-term median of 4.5%. It’s not problematic as yet, and let’s not go looking for problems where they don’t exist.

Consumers out there are consuming. Their credit card balances are high, but it’s not ruinous. The lower income levels are going to get squeezed a lot more from these tariffs than will the higher income levels. Businesses are adapting much faster than we saw in 2018 and then what we even saw in 2020-21 to supply chain issues a la the tariffs this time. China’s not going into a swoon over all this. Their exports to the United States in April were down 21%, but to the world at large, they were up 8.1%. That tells an awful lot about the world scene and how China’s coping with everything going on.

We are coping, so don’t look for interest rate decline. Look for interest rates to stay flat-ish. Capture the oddball decline as it comes and assume that you are going to generally feel better about economic conditions the deeper we go into 2025.

That’s it for our Fed Watch this week. I hope you have a great weekend and we’ll catch you on the other side.