Fed Week – The Daily Tearsheet

Vital Statistics:

Stocks are higher as we enter Fed Week. Bonds and MBS are down small.

The week ahead will be dominated by the September FOMC meeting. The Fed is expected to cut the Fed Funds rate by 25 basis points. Aside from the Fed meeting we will get homebuilder sentiment, retail sales and housing starts. Homebuilder Lennar will announce earnings on Thursday.

The Fed Funds futures are all-in on a 25 basis point cut at the September meeting. They are pricing in a small chance of a 50 basis point cut. Supposedly the Senate will confirm Fed nominee Stephen Miran this week so he can vote at the September meeting.

The bond market has rallied ahead of the meeting, so any rate cut is probably baked in the cake. That said, we will get a fresh set of economic projections and a new dot plot.

The dot plot from June showed the Committee divided between no cuts this year and two cuts.

The Fed Funds futures are solidly predicting a final Fed Funds rate between 3.5% and 3.75%, which would correspond with the bottom two dots in the far left column. If the September dot plot doesn’t confirm that, then we could see a bond market sell-off. That said, the facts on the ground today versus June have changed a lot, with tariff-push inflation relatively modest and a deteriorating job market.

Consumer sentiment fell in August according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment moved down less than three index points in early September. This month’s easing in economic views was particularly strong among lower and middle income consumers. Buying conditions for durables improved, while all other index components fell. Consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets, and inflation. Likewise, consumers perceive risks to their pocketbooks as well; current and expected personal finances both eased about 8% this month. Trade policy remains highly salient to consumers, with about 60% of consumers providing unprompted comments about tariffs during interviews, little changed from last month. Still, sentiment remains above April and May 2025 readings, immediately after the initial announcement of reciprocal tariffs.”

Year-ahead inflation expectations were unchanged at 4.8%, while longer-term expectations increased to 3.9%.

The MBA is against the idea of merging Fannie and Freddie, saying that competition is needed in the GSE space.

Competition between Fannie Mae and Freddie Mac has been central to their success in providing liquidity and stability to the mortgage market. Creating a government-conferred monopoly would diminish innovation, degrade service to market participants, and heighten systemic risk by concentrating housing finance operations within a single entity.

Conservatorship itself has already constrained the GSEs’ ability to compete and innovate. Many stakeholders have described this as the “HUDification” of the enterprises—a gradual erosion of their entrepreneurial and competitive character. A merger or common ownership structure would compound this problem, undermining the very rationale for re-privatization and reducing the incentives necessary for robust competition under a sound regulatory framework.

Business conditions in New York State fell in August, according to the New York Fed. General Business Conditions fell 21 points to -8.7 as new orders dropped 30 points. Don’t know why the NYS Fed characterized the decline as “modest.” Both the prices paid and prices received indices fell, which means inflation is declining however it is still elevated.

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