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Are Markets Overly Optimistic About Rate Cuts?
The Macro Institute's Weekly Economic Primer
The Macro Institute
July 21, 2025
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This is a quiet week on the economic data front, especially when it comes to market-moving releases. We’ll get a few more regional PMIs for July, with the Richmond Fed Index on Tuesday and Kansas City Fed on Thursday. Results so far look solid, but there are early signs that inflation pressures are building.
Several housing indicators also hit this week, but given where mortgage rates are, it’s hard to expect any upside surprises.
One series worth watching is Manufacturing New Orders for Durable Goods. This is a data point we usually don’t give a lot of attention to, but as the chart shows, it often signals where the broader economy is headed. Right now, it’s pointing to stronger U.S. growth in the back half of the year. Watch that update on Friday.
The Macro Week In Review
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The Macro Week Ahead
🏦 Fed Chair Situationship
The Federal Reserve isn’t known for transparency in its actions or words, so when the NY Post reported that the Fed was spending $2.5 billion on a new HQ, allegedly prompting Chair Powell to consider resigning, it set off alarm bells. While Powell dismissed the story as exaggerated, the damage was done. Critics of government overreach, both inside and outside of the financial world, seized on it.
Adding fuel to the fire, reports surfaced last week that President Trump had formally explored firing Powell. This sparked a jump in bond yields and a quick rally in gold. This should be a strong signal of what Fed independence means to global markets.
Powell’s term ends in May 2026 and the search for his replacement is underway. According to Treasury Secretary Scott Bessent, Kevin Hassett and Kevin Warsh are front-runners. Powell could stay as a Fed governor until 2029, but Bessent made it clear that 2026 will likely mean Powell’s full exit from the institution.
✂️ Selling The Rate Cut Story
Why the urgency for a new Chair? Both President Trump and Federal Housing and Finance Agency Director Bill Pulte are pushing for aggressive rate cuts to lower federal debt costs and revive the struggling housing market. Pulte argues lower rates will help buyers qualify for mortgages, but rate cuts could also reignite home prices, worsening affordability. This is a point often overlooked.
Meanwhile, Fed Governor Waller added to the noise by calling for rate cuts this month, citing a “weakening” labor market. That’s a curious take, given unemployment just ticked down to 4.1% and structural data suggest wage growth is set to accelerate — especially as deportations tighten labor supply.
The macro data doesn’t support aggressive cuts. July PMIs (Empire and Philly) were solid, with New Orders pointing to robust activity, though possibly reflecting short-term inventory restocking after tariff disruptions. Retail sales beat expectations in June, and same-store sales for the week of July 12th were up 5.2% year-over-year, signaling consumers remain resilient.
Even as the Fed’s public tone turns dovish, market expectations are adjusting the other way. Just three weeks ago, markets priced in a 92% chance of a September rate cut. That’s now dropped to 56%. This is thanks to strong jobs data and a rebound in inflation readings likely reflecting early tariff effects.
As we’ve warned in recent reports: markets may be overly optimistic about rate cuts this year.
📅 The Slow Week Ahead
A relatively quiet macro week, but there are still some signals worth watching.
We’ll get more July regional PMI data from Richmond, Kansas City, and S&P Global’s preliminary PMI. Empire and Philly’s strong results set a high bar. New Orders and Employment components continue to firm and move higher. We thought we might see a brief reprieve in the pricing components of the PMIs after hitting cyclical highs in May, but that didn’t materialize.
Price pressures are also back. Philly’s Prices Paid jumped over 17 points month-over-month in July, just 30% below its inflationary peak. This was the “transitory” surge that eventually led the Fed to hike rates 500 bps. Yet now the Fed is preparing to cut rates?
Expect volatility and maybe a few surprises. We’ll see you next week.
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