Fed Watch – 6/20/2025

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

Hello. I’m Brian Beaulieu from ITR Economics. Thank you for joining me for this edition of Fed Watch.

It’s a really weird week this week. The Redbook data, which shows retail sales, for last week was up 5.2% from a week ago. That’s an improvement from 4.7%. Retail sales, when I digested the data, that was pretty good. When the 3/12 improved to 4.3%, so retail sales nominally running 4.3% ahead a year ago levels. That’s better than the rate of inflation.

The seasonal rise is normal, which is okay, but what’s noteworthy is that it’s better than each of the prior two years, the seasonal rise. And the month-to-month change, which is what press is making a big deal about, was really what you’d expect to see after a very, very strong April. So I’m not sure what all the consternation is when it comes to overall retail sales. Take our advice. Ignore the press. Ignore the bad press about retail sales. They were just fine when you put them in their proper context.

Light vehicle retail sales, even that came in up 2.6% from a ago, and that was really good considering we had all that front running ahead of the tariffs with the April data for retail sales, so that was good. May came in above April. I didn’t think it was going to, so that was a pleasant surprise. And the 3/12 is still in phase B at 8.0%. I don’t know what more people want out of life, folks. Even the light vehicle retail sales numbers look good. Even if you take away gasoline, and I did that because gasoline prices are so low, I wanted to see what retail sales would gonna looked like, and they were up 4.0% from one year ago, versus is 3.1% with gasoline retail sales included.

Supermarkets were up 7.1% from a year ago. Some of that’s going to be food inflation, although it’s not as bad as it could have been because of the tariffs. All of which is to say The Fed’s gonna look at this data and likely interpret it as they don’t need to be cutting interest rates, which is what they released on June 18th, right? They said no cut. They see the economy as expanding at a solid pace. Inflation, they said, remains somewhat elevated. So they’re going to, they said, maintain their outlook for two rate cuts later this year. And that has to be because they’re assuming Personal Consumption Expenditure Inflation and Core Inflation is going to continue to decline. And I think that’s a big if.

We don’t see it happening that way. When we look at the PPI data, tariffs are likely going to have, it doesn’t look like to us that we’re going to get Core Inflation or PCE Price Inflation to continue to move down the way the Federal Reserve would want it. Indeed, the weekly data out of the Dallas Fed says the economy strengthened a little bit over the prior week compared to where we are trending so far this year. So I understand totally that they didn’t want to lower interest rates.

Of course, there was some consternation about that coming from the administration. Request, demand for 250 basis point decline in the Fed funds rate. But folks, the Fed’s not going to do that. There’s no way that they could do that based on what I just told you. Yes, housing was weak for May and that was somewhat distressing, but the Fed’s not going to lower interest rates just because of housing when the broader economy looks to be doing fine.

And I think people have it too much in their heads that there’s going to be this interest rate cut. I’m leaning toward, because we don’t see the PCE core coming down enough, that that’s not going to happen. All which means, by the way, and this is a little bit tangential, the Fed is not going to lower interest rates while the dollar is weakening. That would only exacerbate the future inflation problem, and Treasury Secretary Bessent told us themselves, he expects that the deficit for this fiscal year is going to come in at 6.5 to 6.7% of GDP. That’s insane. And that means future inflation when you’re running those sorts of deficits.

The bond market hasn’t reacted to all this, fortunately for us. We’re looking at a 6.81 30-year fixed rate mortgage, down three bips from last week. And the 10-year government bond yield at 4.40, is down 1.6 bips from the prior week. So we’re not seeing any big movement outside of politics and people’s expectations. Expect the dollar, and it looks like it’s leveling off now, but expect it to stop weakening. So don’t buy into all this, “What am I gonna do? What am I gonna do about the dollar continuing to weaken?” Unless you’re a foreign investor in US Government Bonds, it doesn’t matter to you right now what the dollar is doing, or unless you’re an importer/exporter, it’s a nominal play, because the Fed’s unlikely going to accommodate that interest rate decline. And therefore the market will realize it, and the dollar will strengthen back up.

So that’s the way it is. So much going on this week. Appreciate you joining us. It’s been a fun week and we’ll talk to you next time. Take care.