Fed Should Double-Down on Data Dependency

Dr. Jeffrey Roach, Chief Economist at LPL Financial highlights the importance of Fed independence, the counterintuitive drop in import prices, and the importance of tracking discretionary spending.

Last Edited by: LPL Research

Last Updated: July 21, 2025

Transcript

Jeffrey Roach (00:03):

I am Jeffrey Roach, Chief Economist for LPL Financial with a few key charts to explain what we know about the current macro landscape. First, import prices are lower than last year. Yes, that's right. Despite trade uncertainty, import prices in both June and May were lower than they were at that time last year. Now granted, the end consumer had to deal with hotter prices in June, and we shouldn't be surprised if inflation runs a bit hotter for the rest of the summer, but the pipeline looks encouraging. Second, monitor discretionary spending activity. We know from previous economic cycles that the first shoe to drop here is consumers demand for discretionary items. The periods I highlighted just before the 2001 recession and the 2008 recession illustrate this point. And at this point we do see some slowdown in discretionary spending, but the slowdown is fairly measured. And because of that, investors see this as a time to put money to work and to look for tactical opportunities to take on risk.

Jeffrey Roach (01:05):

A good risk manager knows it's important to monitor the macro landscape. So a few good areas to track are travel, activity, restaurant spending, as well as demand for new or another vehicle. Third, the Fed should not be aggressive. Yes, it's true. Our fed funds rate is higher than several other central banks, including the European Central Bank as I show in this chart. But it's important to note that the Fed needs to remain data dependent and not influenced by political pressures. There is no reason to cut rates aggressively down to 1% or 2% when inflation is above the Fed target. Unemployment is low and the economy is still growing. Yields would spike and the dollar would weaken if the Fed is perceived as a political pawn. So reiterating data dependency is the prudent action right now. I do think the Fed has some room to shave off a few quarter points by the end of the year, but the data does not support a dramatic move as called out by the president. Well, that's all for now. If you want more insights on global market trends, follow us on social media and take care.

Dr. Jeffrey Roach, Chief Economist at LPL Financial highlights the importance of Fed independence, the counterintuitive drop in import prices, and the importance of tracking discretionary spending.

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