Cue the Cuts. Markets are gearing up for a big day tomorrow as the Federal Reserve takes center stage. Policymakers have largely telegraphed their caution to the point that the exciting aspects of the event likely proceeded the meeting itself.

In the lead-up to Wednesday’s interest rate decision, stocks turned in an quiet but down day. The Dow Jones Industrial Average fell 125 points, or 0.3%. The S&P 500 and Nasdaq Composite both closed down 0.1%.

It could to be a brief pause in the market’s rally before the Fed delivers a boost tomorrow in the form of a rate cut.

Today, stocks barely reacted to a surprise in the latest retail sales data. As my colleague Sabrina Escobar reported, retail sales increased 0.6% in August from July. That was a steady pace from the prior month, but much stronger than the 0.2% increase anticipated by economists.

The latest monthly sales gains were broad-based, likely the result of a strong back-to-school shopping season. Additionally, restaurant spending remains relatively firm, suggesting consumers, in aggregate, are still on stable footing.

“The 0.6% rise in last month’s sales—atop solid gains in June and July—was consistent with other data signaling resilient growth during the summer despite signs of a weakening job market and low confidence levels,” wrote Gary Schlossberg, global strategist at Wells Fargo Investment Institute.

Much of the sales momentum can be attributed to higher income households, which are gaining share of total consumer spending. Signs of stress among lower-income households, however, are there—and could be exacerbated in the coming months if inflation continues to tick up as expected.

Schlossberg is expecting a mild slowdown in overall spending growth during the final months of the year, as higher tariffs slowly work their way through the economy.

The Hot Stock: APA Corp. +7.0%
The Biggest Loser: Warner Bros. Discovery -6.2%

Best Sector: Energy +1.%
Worst Sector: Utilities -1.7%

The Federal Open Market Committee’s meeting this week is likely a tense one—and not just because the committee is vigorously debating the appropriate course of action amid weaker labor conditions and persistently higher inflation rates.

The Fed kicked off its two-day policy meeting today a bit later than typical thanks to having to swear in its newest member: Stephen Miran.

President Donald Trump’s latest Fed pick now has to sit at the same table as the woman his boss is attempting to fire. A federal appeals court ruled Monday night that Federal Reserve Gov. Lisa Cook can keep her job as the legal case over her termination moves forward. The White House said today that the administration will fight the latest decision.

So both Miran and Cook are participating in the meeting this week. Will professional courtesy prevail or will this meeting resemble more of a cold war? On a practical level, neither addition to the meeting should have a huge impact on the expectation for a quarter percentage point (25 basis point) cut.

Still, after two Fed governors—Christopher Waller and Michelle Bowman—dissented at the July meeting against keeping rates steady, there could be a bigger split in opinions at this meeting. Some policymakers could even call for a half percentage point cut. Such a move would make markets incredibly happy (and feed the expected sugar high that’s already set to take effect) but is unlikely given the latest Consumer Price Index reading that puts inflation nearly a full percentage point above the Fed’s 2% target.

In addition to issuing a rate decision, FOMC members also will be providing their estimates on where the economy is heading. Given that economic conditions could be at more of an inflection point than they were in June when committee members last offered their predictions, the committee’s summary of economic projections will be of particular interest.

“While there may be speculation about the need for a 50 basis point rate cut, such an emergency-sized move is not justified by the current data. Broader economic indicators—including earnings and credit spreads—does not reflect the kind of deterioration typically warranting that level of action,” writes Seema Shah, chief global strategist at Principal Asset Management. “Although labor demand is softening, labor supply issues continue to offset the weakness, and recession risks remain limited for now.”

The FOMC will release its official statement at 2 p.m. ET tomorrow, followed by the press briefing with Chair Jerome Powell at 2:30 p.m. Follow along for all of Barron’s updates here.

Bullish and General Mills announce earnings tomorrow.

The FOMC releases its monetary policy decision as well as its quarterly Summary of Economic Projections. The central bank is widely expected to cut the federal-funds rate by a quarter of a percentage point, to 4%-4.25%.

The Census Bureau reports new residential construction data for August. Expectations are for a seasonally adjusted annual rate of 1.37 million privately owned housing starts, about 60,000 fewer than in July.

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