September 11, 2025

QuickTakes

25 Or 50, To Be Or Not To Be?

Following yesterday's cooler-than-expected PPI and today's as-expected CPI, expectations are that the FOMC will cut the federal funds rate by 25 basis points on September 17, with no dissenters to that decision among voting members. Following today's jump in last week's initial unemployment claims, meeting participants might consider a 50-basis-point cut; but we doubt that they will opt for that, as the majority would likely dissent. Instead, the committee might signal the likelihood of more rate cuts ahead in its Summary of Economic Projections.

Speaking of projections: We are raising our year-end S&P 500 target from 6600 to 6800. That’s our base-case scenario with a subjective probability of 55%. We currently assign a 25% subjective probability to a meltup that lifts the S&P 500 to 7000 by year-end 2025 and 20% odds to a correction in the index by the end of this year. If the Fed lowers the federal funds rate on September 17 and signals more rate cuts ahead, we will increase our odds of a meltup and decrease our odds of a correction.

We are still not convinced that the economy needs to be stimulated by the Fed. Inflation remains closer to 3.0% y/y than to the Fed's 2.0 target. Real GDP is growing solidly despite the recent downward revisions in payroll employment. The unemployment rate remains between 4.0% and 4.3%. All this implies that either real GDP will weaken significantly and the jobless rate soon will rise sharply or that productivity growth is making a strong comeback. We pick Door #2! 

Consider the following:

(1) GDP. Yesterday, despite August's weaker-than-expected employment report, the Atlanta Fed's GDPNow model estimated that real GDP rose 3.1% (saar) during Q2, up from 3.0% on September 4 (chart). Capital spending on equipment and exports are robust. Consumer spending is solid at 2.3%. Real GDP was up 3.3% during Q2.

(2) Labor market. Initial unemployment claims jumped 27,000 last week to 263,000 (seasonally adjusted), the highest reading so far this year (chart). This number could persuade a few FOMC participants to press for a 50-basis-point rate cut. So far, it is only a one-week spike, which has occurred occasionally in the past. In addition, 15,000 of the increase (not seasonally adjusted) occurred in Texas. That seems like a one-time aberration, unless a large number of oil field workers were let go last week.

(3) Productivity. Strong GDP growth, coupled with a seemingly weak labor market, suggests that productivity growth must be robust. Over the past 12 quarters, productivity growth has averaged 2.1%, precisely the same as its average over time. In our Roaring 2020s scenario, we expect growth to approach 3.0% over the remainder of the decade.

(4) Inflation. Meanwhile, the core CPI, core PCED, and core PPI for consumption—all excluding shelter—are closer to 3.0% than to 2.0%, as noted above (chart). 

Trump's tariffs have caused a slight increase in durable goods inflation. That is likely to be a transitory problem. A stickier problem is that measures of the "supercore" inflation rate remain sticky between 2.9% and 4.0% (chart).

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