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Fed holds rates steady and notes progress on inflation

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Federal Reserve holds steady on rates in July, points to 'some further progress' on inflation

WASHINGTON – Federal Reserve officials on Wednesday held short-term interest rates steady but indicated that inflation is getting closer to its target, which could open the door for future interest rate cuts.

Central bankers made no obvious indications, though, that a reduction is imminent, choosing to maintain language that indicates ongoing concerns about economic conditions, albeit with progress. They also preserved a declaration that more progress is needed before rate reductions can happen.

“The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance,” the Federal Open Market Committee’s post-meeting statement said, a slight upgrade from previous language.

“Inflation has eased over the past year but remains somewhat elevated,” the statement continued. “In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.”

However, speaking with the media, Chair Jerome Powell indicated that while no decision has been made about actions at future meetings a cut could come as soon as September if the economic data showed inflation easing.

“If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September,” Powell said.

Stocks react to Powell comments

Markets had been looking for signs that the Fed will reduce rates when it next meets in September, with futures pricing pointing to further cuts at the November and December meetings, assuming quarter percentage point moves. Stocks rallied to the highest levels of the day on Powell’s comments.

As for the Fed’s statement, its language also represented an upgrade from the June meeting, when the policy statement indicated only “modest” progress in bringing down price pressures that two years ago had been running at their highest level since the early 1980s. The previous statement also characterized inflation as simply “elevated,” rather than “somewhat elevated.”

There were a few other tweaks as well, as the FOMC voted unanimously to keep its benchmark overnight borrowing rate targeted between 5.25%-5.5%. That rate, the highest in 23 years, has been in place for the past year, the result of 11 increases aimed at bringing down inflation.

One change noted that committee members are “attentive” to the risks on both sides of its mandate for full employment and low inflation, dropping the word “highly” from the June statement.

Still, the statement kept intact one key sentence about the Fed’s intentions: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

That phrase has underscored the Fed’s data dependence. Officials insist they are not on a predetermined course for rates and won’t be guided by forecasts.

Price pressures off 2022 peak

Economic data of late has indicated that price pressures are well off the boil from their peak in mid-2022, when inflation hit its highest level since the early 1980s.

The Fed’s preferred measure, the personal consumption expenditures price index, shows inflation around 2.5% annually, though other gauges indicate slightly higher readings. The central bank targets inflation at 2% and has been insistent that it will stick with that goal despite pressure from some quarters to tolerate higher levels.

Though the Fed has held to its tightest monetary policy in decades, the economy has continued to expand.

Gross domestic product registered a 2.8% annualized growth rate in the second quarter, well above expectations amid a boost from consumer and government spending and restocking of inventories.

Labor market data has been a little less robust, though the 4.1% unemployment rate is far from what economists consider full employment. The Fed statement noted that unemployment “has moved up but remains low.” A reading Wednesday from payrolls processing firm ADP showed July private sector job growth of just 122,000, indicating that the labor market could be weakening.

However, there was some positive inflation data in the ADP report, with wages increasing at their slowest pace in three years. Also Wednesday, the Labor Department reported that costs of wages, benefits and salaries increased just 0.9% in the second quarter, below expectations and the 1.2% level in the first quarter.

Fed officials have vowed to proceed carefully, despite signs that inflation is weakening and worries that the economy won’t be able to withstand the highest borrowing costs in some 23 years for much longer. Their position got some fortification Wednesday, when yet another economic report showed that pending home sales surged a stunning 4.8% in June, defying expectations for a 1% increase.

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These are 3 big things we’re watching in the stock market this week

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A security guard works outside the New York Stock Exchange (NYSE) before the Federal Reserve announcement in New York City, U.S., September 18, 2024. 

Andrew Kelly | Reuters

The stock market bounce last week showed once again just how dependent Wall Street has become on the whims of the White House.

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These U.S. consumer stocks face higher China risks

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Apple iPhone assembly in India won’t cushion China tariffs: Moffett

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Street's biggest Apple bear says a production move to India is unrealistic

Leading analyst Craig Moffett suggests any plans to move U.S. iPhone assembly to India is unrealistic.

Moffett, ranked as a top analyst multiple times by Institutional Investor, sent a memo to clients on Friday after the Financial Times reported Apple was aiming to shift production toward India from China by the end of next year.

He’s questioning how a move could bring down costs tied to tariffs because the iPhone components would still be made in China.

“You have a tremendous menu of problems created by tariffs, and moving to India doesn’t solve all the problems. Now granted, it helps to some degree,” the MoffettNathanson partner and senior managing director told CNBC’s “Fast Money” on Friday. “I would question how that’s going to work.”

Moffett contends it’s not so easy to diversify to India — telling clients Apple’s supply chain would still be anchored in China and would likely face resistance.

“The bottom line is a global trade war is a two-front battle, impacting costs and sales. Moving assembly to India might (and we emphasize might) help with the former. The latter may ultimately be the bigger issue,” he wrote to clients.

Moffett cut his Apple price target on Monday to $141 from $184 a share. It implies a 33% drop from Friday’s close. The price target is also the Street low, according to FactSet.

“I don’t think of myself as the biggest Apple bear,” he said. “I think quite highly of Apple. My concern about Apple has been the valuation more than the company.”

Moffett has had a “sell” rating on Apple since Jan. 7. Since then, the company’s shares are down about 14%.

“None of this is because Apple is a bad company. They still have a great balance sheet [and] a great consumer franchise,” he said. “It’s just the reality of there are no good answers when you are a product company, and your products are going to be significantly tariffed, and you’re heading into a market that is likely to have at least some deceleration in consumer demand because of the macro economy.”

Moffett notes Apple also isn’t getting help from its carriers to cushion the blow of tariffs.

“You also have the demand destruction that’s created by potentially higher prices. Remember, you had AT&T, Verizon and T. Mobile all this week come out and say we’re not going to underwrite the additional cost of tariff [on] handsets,” he added. “The consumer is going to have to pay for that. So, you’re going to have some demand destruction that’s going to show up in even longer holding periods and slower upgrade rates — all of which probably trims estimates next year’s consensus.”

According to Moffett, the backlash against Apple in China over U.S. tariffs will also hurt iPhone sales.

“It’s a very real problem,” Moffett said. “Volumes are really going to the Huaweis and the Vivos and the local competitors in China rather than to Apple.”

Apple stock is coming off a winning week — up more than 6%. It comes ahead of the iPhone maker’s quarterly earnings report due next Thursday after the market close.

To get more personalized investment strategies, join us for our next “Fast Money” Live event on Thursday, June 5, at the Nasdaq in Times Square.

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