Fed Cuts Rates, Home Construction Cools

The Fed made its first rate cut of the year amid rising concerns about the job market. Meanwhile, homebuilders remain cautiously optimistic about the future, even as new construction activity slowed. Read on for more key takeaways.

• Fed Cuts Rates as Labor Market Concerns Grow
• Builder Confidence Steady, Outlook Improves
• New Construction Cools in August
• Retail Sales Beat Expectations
• Initial Jobless Claims Drop After Recent Spike

Fed Cuts Rates as Labor Market Concerns Grow

After keeping interest rates steady at its first five meetings this year, the Federal Reserve cut the benchmark Fed Funds Rate by 25 basis points, setting a new target range of 4% to 4.25%. The move was widely expected as the Fed continues to navigate concerns over both inflation and a softening job market.

While the Fed acknowledged that inflation remains slightly elevated, it also noted that “downside risks to employment have risen.” This shift in risk led to the decision to ease monetary policy.

In a notable dissent, new Fed Governor Stephen Miran pushed for a larger 50 basis point cut.

Keep in mind: The Fed Funds Rate is the rate banks charge each other for overnight loans. It doesn’t directly set mortgage rates, but it does influence borrowing costs across the economy.

What’s the bottom line? The Fed is walking a tightrope between keeping inflation in check and supporting the labor market. High inflation typically limits the Fed’s ability to cut rates, while signs of economic slowdown may push it to act.

Fed Chair Jerome Powell emphasized the challenge, stating that there is “no risk-free path” as the Fed weighs inflation concerns against growing labor market weakness.

That uncertainty is clear in the Fed’s projections, which show a wide range of opinions on future moves. Of the nineteen officials, seven expect no additional rate cuts this year (with one even calling for a hike), two anticipate one more quarter-point cut, nine project two more cuts of the same size – and one is forecasting five.

Other key forecasts remained mostly unchanged. Core PCE inflation is still projected at 3.1%, and the unemployment rate is expected to rise to 4.5%. GDP growth, however, was revised slightly higher, from 1.4% to 1.6%.

Builder Confidence Steady, Outlook Improves

Home builder confidence held at 32 in September, according to the National Association of Home Builders (NAHB), staying well below the key 50 level that signals growth. While current sales expectations were unchanged and buyer traffic dipped slightly, expectations for future sales rose to a six-month high.

What’s the bottom line? Although overall sentiment remains low, builders are increasingly hopeful that lower interest rates could bring more buyers into the market by the end of the year.

New Construction Cools in August

This cautious optimism among builders comes as construction activity slowed last month. After a surprising jump in July, Housing Starts dropped 8.5% in August to an annual rate of 1.31 million units, falling short of the 1.37 million expected. Both single-family and multi-family construction declined.

Building Permits – a key indicator of future construction – also fell 3.7% to a 1.31 million rate, the lowest level in five years. Single-family permits dropped to their lowest point so far this year.

What’s the bottom line? There were 611,000 single-family homes under construction in August, down 2.1% from July and 4.8% from a year ago – the lowest since early 2021. The market still needs more available supply to keep up, especially as buyer demand is expected to grow if mortgage rates continue to fall. But increasing supply takes time, as builders must go through the full cycle of permitting, starting and completing homes.

Looking ahead, NAHB Chief Economist Robert Dietz said that a shift toward easier monetary policy could bring down interest rates on construction and development loans, helping builders ramp up production.

Retail Sales Beat Expectations

Retail sales rose by 0.6% in July – triple the 0.2% increase that was expected – marking the third straight monthly gain. July figures were also revised slightly higher.

A key measure known as the “control group” (which excludes autos, gas, building materials, and food services) climbed 0.7%, beating forecasts by 0.3%. This is important because it directly factors into GDP growth.

What’s the bottom line? Consumers are still spending, despite higher prices from tariffs. Sales gains were broad, with 9 of 13 retail categories showing growth – led by online shopping, clothing and sporting goods, likely due to back-to-school demand.

Initial Jobless Claims Drop After Recent Spike

Following a four-year high, initial jobless claims fell by 33,000 to 231,000, coming in below expectations. Continuing claims, which reflect the number of people still receiving unemployment benefits, also dipped by 7,000 to 1.92 million.

What’s the bottom line? While the drop in new claims is a positive sign, continuing claims have remained above 1.9 million for 17 straight weeks. This suggests it's taking longer for people to find new jobs, pointing to a cooling labor market.