In the Oscar-nominated (but now controversial) documentary Super-Size Me, filmmaker Morgan Spurlock spent a month eating nothing but fast food. When restaurant employees asked if he wanted to up-size his meal, his self-authored rules required him to say yes, and by the end of the 30-day experiment, Spurlock had gained nearly 25 pounds — extra weight that it reportedly took more than a year for him to lose.

Federal Reserve Chairman Jerome Powell certainly looks fit and trim, so his apparent preference for super-sizing came as a bit of a surprise to me (by the way, this is what passes for a mea-culpa: I fully expected the Federal Reserve (The Fed) to take a more conservative approach and only cut rates by a quarter-point instead of the half-point they gifted to the market on Wednesday.)¹  Regardless, the metaphor is still mostly an appropriate one: Just like filmmaker Spurlock, equity markets quickly packed on extra pounds in response — within minutes of the decision, the S&P 500® Index put on a cool 62 points (or roughly 1.1%) while the Nasdaq Composite piled on 195-plus points (for a very similar 1.1% gain). 

Like just about everything in life, fast food — and Fed rate cuts — are fine in moderation. And while the dopamine hit associated with consuming biggie-sized fries/rate-cuts is real, it’s certainly fair to question the wisdom of super-sizing everything at every opportunity, Fed cuts included. And last week, markets appeared to do just that: Quite unlike the movie-maker, the market didn’t hold on to its extra weight for long: By Wednesday’s close, both indices were slightly lower for the day. And backing up for a slightly longer-term perspective tells pretty much the same story: Last week’s percent-and-a-half gain for U.S. large-cap stocks doesn’t exactly scream “sugar rush” (or, for that matter, “heart disease”). So markets took the Fed’s super-sized cut mostly in stride, leaving stocks modestly higher (and, unsurprisingly, short-term rates sharply lower).

At least some of that mostly ho-hum response is probably because Powell once again did a masterful job selling his actions and those of his Committee: During the post-decision press conference, he carefully laid out the case for 0.50% by suggesting the Fed up-sized its cut because it could afford to, not because the economy or labor market suggested it needed to. He was also careful to point out that while Wednesday’s cut was “a good, strong start,” the Fed was also “not in a rush” to cut rates — an apparent nod to those (like me) who worried that a bigger-than-normal cut might signal that an acute unease about the economy had permeated the halls of the Fed.

But make no mistake, a half-point cut is somewhat unusual: By my accounting, the Fed has moved the target federal funds rate either higher or lower more than 130 times since Alan Greenspan took over in August 1987, and nearly 75% of those moves have been by a quarter-percent or less (with a strong majority of those exactly a quarter-percent). By contrast, only about one in five have been half-percent moves (and only a very small minority were larger — which incidentally puts the three back-to-back-to-back three-quarters-of-one-percent increases that took place in 2022 to halt rampant inflation in even starker contrast).

So the Fed clearly seems to view quarter-point increments as its preferred modus operandi, which means the bank was bound to raise an eyebrow or two with last week’s decision when it went big. But Powell seemed to anticipate that concern, too, pointing out that nobody should assume that a half a percent is the new pace at which the Fed would move to remove the restriction represented by higher rates. Notably, that view was also generally supported by the latest update of the infamous “dot plot,” which now suggests another half percent of easing by year-end² spread evenly, one would assume, between the two remaining Fed meetings for this year, one on November 7 and another on December 18.

But the updated dot plot has also moved a handful of quarter-percent cuts originally expected to take place in late 2025 or 2026 squarely into next year. Such a pulling forward of future expected rate cuts could be because the labor market has obviously softened since June’s edition, or perhaps because Fed’s own staff economists now see a slightly weaker trajectory for both growth and employment for the remainder of this year and into next. That much was hinted at in the Staff Economic Projections, the same document that houses the dot plot.

Indeed, Wednesday’s rate cut was certainly welcome news for the U.S. economy, but part of the concern all along has been whether the damage was irreversibly done months ago when the Fed was still stuck in aggressive tightening mode. The economy itself hasn’t given us much direction on that score because the data have been famously mixed. That continued last week when retail sales once again surprised to the upside³ even as the Conference Board’s index of leading economic indicators continued to erode.⁴ The first two regional Fed manufacturing reports couldn’t agree with one another, either, with New York’s Empire State Manufacturing surging to its best result in nearly a year while its sibling release, the Philly Fed, continued to struggle under the weight of rapidly declining production and new order activity.⁵

For its part, the suddenly important-all-over-again housing sector provided mixed messages of its own. Builders are obviously preparing themselves for lower rates as the Fed loosening cycle gets underway, with 1) sizable gains in both housing starts and permits and 2) a slight improvement in the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index standing in as evidence, even as existing home sales declined a bigger-than-expected 2.5%.^6,7,8 But trends remain depressed, and a solid recovery in housing is perhaps second only to a “refirming” of the labor market on the list of things to watch for if you want to be convinced that the soft landing is for real.

Given all this ambiguity, it’s tempting to turn to corporate earnings for clues. But if earnings are a clearer glass through which to view the economy, last week’s picture wasn’t exactly great. Package shipper FedEx missed analysts’ estimates badly, hampered by weak demand and a shift away from premium services that dented its profit margins and forced the company to reset expectations about the remainder of the year. Something similar happened to homebuilder Lennar, which also saw weaker-than-expected results on softer margins and an unfavorable product mix. And rounding out last week’s small and offcadence earnings parade was Darden Restaurants, owner of the Olive Garden and Texas Roadhouse brands, among others. While the restaurateur’s release was better received than either FedEx’s or Lennar’s, it still contained hints of stress at the macroeconomic level, including word that diners are still trading down by eschewing the company’s fine-dining segment in favor of the cheaper properties in its portfolio.

So even if Powell’s super-sizing behavior hasn’t necessarily doomed the market to a future of elevated triglycerides and cholesterol-clogged arteries, it seems pretty clear that the economy is suffering from at least a little indigestion based on the Fed’s prior behavior under Powell’s watch. Stay tuned to see whether the prognosis improves … or gets worse.

What to watch this week

It’s a fairly busy week, with housing data remaining in focus; several bits of consumer-relevant data; and an active, post-decision Fed speaking calendar that features Federal Reserve Board member Adriana Kugler on Wednesday and both Chair Powell and Vice Chair William Barr on Thursday. The prize for most prolific speaker goes to Board member Michelle Bowman, who is expected to speak publicly no fewer than three times this week (Tuesday, Thursday, and Friday). Bowman’s words might get the most scrutiny because she was the lone member of the Federal Open Market Committee (FOMC) to dissent to Wednesday’s decision to cut rates by 0.50%. Bowman instead voted for just a quarter-point reduction, making her the first Board member to disagree with the FOMC since 2005.

Housing data will remain in focus, with two reads on home prices due Tuesday and the volume of new and pending home sales data expected Wednesday and Thursday, respectively. So far, home sales have yet to respond to declining mortgage rates as buyers and sellers wait for further improvements in affordability. That makes Tuesday’s home price data particularly important.

We also get at least three views into the U.S. consumer this week: two survey-based reads (including the Conference Board’s consumer confidence survey on Tuesday and the University of Michigan’s consumer sentiment index on Friday) as well as the Bureau of Economic Analysis’s income and outlays report on Friday. Of all the data on tap this week, I’d put income and outlays at the top of the list, primarily because it also includes an important read on inflation. At some point the U.S. consumer’s durability will be tested, and this week’s data may help provide clues as to when that might be.

We’ll also get several more reads into the health of the nation’s manufacturing sector, with durable goods orders due out on Thursday alongside several more regional Fed manufacturing reports (Richmond on Tuesday and Kansas City on Thursday). But for a more geographically comprehensive view that also includes data on the bigger (but less cyclically oriented) services sector, pay attention to Monday’s flash Purchasing Managers Indices (PMIs) on Monday. Again, weakness in manufacturing is currently being papered over by strength in services, keeping growth positive. Watch these and similar releases for clues about whether this can continue.

Finally, as a counterpoint to last week’s Index of Leading Economic Indicators, or LEI, pay attention to the Chicago Fed’s National Activity Index, or CFNAI. While similar in spirit to the LEI, the Chicago Fed’s CFNAI includes a wider array of economic variables than the LEI and attempts to put statistical bounds around its output with respect to the future path of both economic growth and inflation. It’s drier and more prone to revision than the LEI, but it can sometimes provide a more detailed view. Read Monday’s release for more details.