Fed Policy, Economic Growth & Sector Trends
The Federal Open Market Committee (FOMC) voted 9 to 3 to keep the federal funds rate in a range of 3.50% to 3.75%. The three dissenters are known hawks — policymakers who favor higher interest rates to fight inflation more aggressively.
Federal Reserve (Fed) Chair Kevin Warsh said the Committee remains fully committed to its 2% inflation goal and will not accept a higher target. He noted that, since the last FOMC meeting, markets have already tightened financial conditions on their own and that business investment, especially in technology, remains strong.
Reporters Play Hardball With Fed Chair On Interest Rates
Seven of the nine reporters who posed questions to Fed Chair Warsh after the latest policy meeting took an unusually confrontational approach. They repeatedly asked why rates were raised immediately, challenged the decision to hold rates steady, and showed far less deference than is customary for a Fed chair. (Yes, new Fed Chairs are always tested, but this seemed especially strident.)
Even the more measured questions from Nick Timiraos of The Wall Street Journal and Brian Chung of NBC carried a sharper edge to their questions than usual. In response, Warsh noted that he has held the job for only 8½ weeks while inflation has run above the Fed’s 2% target for more than five years.
Imports And Lower Government Spending Held Back Second-Quarter Growth
Second-quarter economic growth came in softer than most analysts expected. The official measure of total U.S. output, Gross Domestic Product (GDP), rose at only a 1.5% annual rate, lower than the expected 1.8%. Consumer spending stayed solid and continued to support the economy.
The weaker headline number was caused mainly by a larger-than-expected jump in imports and a small drop in government spending. Imports are subtracted from the GDP calculation, and they surged, which pulled the overall growth rate lower — even though American households kept spending.
AI Investment Rose, but Technology Imports Offset Much of the Gain
Companies spent heavily on artificial intelligence (AI) equipment and data center capacity in recent quarters. That capital investment normally adds to economic growth. At the same time, a large share of the servers, chips, and related gear was imported. Imports reduce the GDP total, so the investment boost and the import drag largely canceled each other out. In one recent quarter, the two forces were almost equal in size.
Core Consumer Prices Cooled, but Broader Inflation Pressures Reappeared
The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, continued to match what economists had forecast and showed further cooling in June. That softer reading gave the Fed room to leave interest rates unchanged.
In contrast, the broader GDP price index, which covers all goods and services produced in the United States, accelerated to a 6.2% annual rate in the second quarter (up from its earlier peak of 9.4% in 2022). Two forces drove this increase:
- Energy Prices: Rose sharply due to ongoing conflict with Iran and related shipping disruptions.
- AI Import Volume: Reduced real GDP and, by simple arithmetic, pushed the price deflator higher.
Market Technicals: S&P 500 & Semiconductors Oversold
- S&P 500 Index: Had a 5% correction off its high, creating an oversold 14-day Stochastic reading while holding key support levels. The index needs to respond to this oversold level to avoid another leg down.
- Semiconductor Sector (SMH): The VanEck Semiconductor ETF corrected 25%, creating an oversold condition. Similar to the 1990s Dot-Com period (which saw 30%-50% pullbacks during an ongoing bull trend), semiconductors remain leaders of this secular bull market.
- WTI Crude Oil: Prices remain range-bound between the 100-day moving average ($90) and 200-day moving average ($76), indicating elevated energy costs ahead.
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