Markets Finish the Week Down as Fed Signals More Caution Ahead

Markets Finish the Week Down as Fed Signals More Caution Ahead

Major U.S. equity indexes moved lower last week as cautious remarks from Federal Reserve officials dampened optimism around the pace of interest rate cuts. Global equities, measured by the MSCI All Country World Index (ACWI), declined 0.82%, while U.S. equities, represented by the S&P 500, fell 0.74%. The Russell 2000, which tracks U.S. small-cap companies, also finished lower, marking its first negative week since early August.

Negative Sentiment Following Fed Comments

Negative sentiment was fueled by comments from Federal Reserve officials signaling a more cautious path for monetary policy easing than markets anticipated. Fed Chair Jerome Powell described the economy as a “challenging situation,” pointing to upside inflation risks, downside labor market pressures, and “fairly highly valued” equity prices. St. Louis Fed President Alberto Musalem and Atlanta Fed President Raphael Bostic echoed this cautious view, stressing persistent inflation concerns. Collectively, these remarks weighed on investor optimism about the pace of future rate cuts.

Inflation Rate Held at 2.9% in August

Inflation showed little change in August as the Federal Reserve’s preferred gauge, the core personal consumption expenditures (PCE) price index that excludes food and energy, rose 0.2% from the prior month. This increase was in line with both market expectations and July’s revised reading, pointing to a steady pace of price growth. On a year-over-year basis, core PCE advanced 2.9%, which was also unchanged from July. At the same time, consumer activity showed resilience, with personal spending rising 0.6% and personal income increasing 0.4%.

U.S. Economy

The U.S. economy expanded in the spring at a faster pace than earlier estimates suggested. On Thursday, the Bureau of Economic Analysis reported its third estimate of second-quarter GDP growth, showing an annualized expansion of 3.8%. This marked an upward revision from the prior estimates of 3.3% in August and 3.0% in July. The improvement was driven largely by resilient consumer spending, which continues to serve as a key support for the broader economy despite persistent inflation pressures.

Looking Ahead

Looking ahead, the first Friday of the month brings the closely watched U.S. labor market report. The September release will provide clarity on whether recent signs of weakening employment conditions have continued. In August, the economy added just 22,000 jobs, falling well short of economists’ expectations, while the unemployment rate ticked up to 4.3%, its highest level since 2021. The upcoming report will be closely monitored for confirmation of a cooling labor market and its potential implications for Federal Reserve policy.

As Always

I’d like to leave you with the final line we’ve used since we started these commentaries back at the very height of market volatility in March 2020. Always remember that we create financial/investment plans not for the easy times, but to prepare for the tough ones.