Retail Sales Climb for Third Month as Fed Cuts Rates

Weekly Economic Review: Sept. 22, 2025

This week’s key economic events include: (1) retail sales data and (2) the September Federal Open Market Committee (FOMC) meeting.

Key Summary:

Retail sales rose for the third straight month in August, driven by strong consumer spending across key categories like online shopping, clothing, and dining, reflecting seasonal demand and economic resilience despite inflation and labor market concerns.

Retail sales continued to show strength in August, marking the third consecutive month of growth. The monthly increase was stronger than expected and reflected solid consumer demand, particularly in categories tied to seasonal spending. Year-over-year growth also accelerated, reaching its highest level in several months, signaling continued momentum in household consumption.

Most retail categories posted gains, with online shopping, clothing, and sporting goods leading the way—likely driven by back-to-school purchases. Food services and drinking places also rebounded, suggesting improved consumer confidence in discretionary spending. A few categories, such as furniture and general merchandise, saw modest declines, but overall breadth of growth was notable.

The strongest contributors to the monthly increase came from online sales, motor vehicles, and food services, which together accounted for the majority of the overall gain. When excluding volatile components like autos and gasoline, core retail sales showed even stronger growth. The control group, which feeds directly into GDP calculations, also outperformed expectations and posted its best annual growth in over a year.

This sustained strength in retail activity highlights the resilience of consumers despite headwinds such as elevated prices and a softening labor market. While positive for the economy, it complicates the Federal Reserve’s path forward on interest rate policy. The robust performance of the control group suggests solid third-quarter economic growth, aligning with forecasts that point to continued expansion following a strong second quarter.

The Federal Reserve lowered its benchmark interest rate to a target range of 4.00% to 4.25% during its September meeting, framing the move as an “insurance” cut to guard against rising risks in the labor market despite ongoing inflation pressures.

The Federal Reserve lowered its benchmark interest rate for the first time this year, setting a new target range of 4.00% to 4.25%. This decision came after five consecutive meetings with no change and was supported by nearly all committee members, except for one who favored a larger cut. The move signals a shift in policy aimed at addressing emerging economic risks, particularly in the labor market.

Chair Jerome Powell described the rate cut as a precautionary step to manage downside risks, especially as job growth slows and unemployment begins to rise. Despite inflation remaining elevated, the Fed opted to ease policy to support employment and maintain economic momentum. Alongside the rate decision, the Fed released updated projections showing expectations for stronger growth and lower unemployment in the coming years.

The Fed’s outlook includes a gradual path of rate reductions through the next two years, with long-term rates stabilizing at a neutral level. Economic forecasts point to modest improvements in GDP growth and a steady decline in unemployment, while inflation is expected to ease gradually toward the Fed’s target. These projections reflect a cautiously optimistic view of the economy, balanced by ongoing concerns about inflation and labor market conditions.

Further details on retail sales and the September FOMC meeting are provided below.

Retail Sales – August Update:

Retail sales rose 0.6% month-over-month in August, matching July’s revised increase of 0.6% (up from an initial estimate of 0.5%), according to the U.S. Census Bureau. The August figure significantly exceeded market expectations of a 0.2% gain. On a year-over-year basis, retail sales grew 5.0%, up from 4.1% in July—marking the strongest annual growth since April.

Of the 13 retail categories tracked, 9 posted gains in August. Notable increases included:

• Non-store retailers (online): +2.0%
• Clothing & accessories: +1.0%
• Sporting goods: +0.8%
• Food services & drinking places: +0.7%
• Motor vehicles & parts: +0.5%

Other categories showing growth included electronics & appliances, building materials, food & beverage stores, and gasoline stations. Food services & drinking places, a key indicator of household financial health and the only services component in the report, rose 0.7%, a reversal from the 0.1% decline in July.

Conversely, four categories declined:

• Miscellaneous store retailers: -1.1%
• Furniture & home furnishings: -0.3%
• Health & personal care stores: -0.1%
• General merchandise stores: -0.1%

Major contributors to the 0.6% headline monthly gain included:

• Online sales: +0.35%
• Motor vehicle & parts sales: +0.1%
• Food services & drinking places: +0.1%

Together, these three categories accounted for 0.55% of the total monthly increase, underscoring their dominant role in August’s retail sales growth.

Excluding autos and gasoline, retail sales rose 0.7% month-over-month in August, outperforming the expected 0.4% increase, and were up 5.4% year-over-year. The control group, which excludes food services, autos, building materials, and gasoline stations—and is used to calculate GDP—also rose 0.7%, beating the 0.4% forecast and improving from a 0.5% gain in July. On an annual basis, control group sales increased 5.9%, marking the strongest year-over-year growth since February 2023.

Retail sales rose in August for the third consecutive month, driven primarily by online retailers, clothing stores, and sporting goods, reflecting strong back-to-school shopping activity. This momentum came despite higher costs on tariff-sensitive goods and signs of a softening labor market, highlighting the continued resilience of consumers. While this strength is positive for the broader economy, it presents a policy challenge for the Federal Reserve, potentially complicating decisions around future rate cuts. The robust control group sales reported for August suggest solid economic growth in the third quarter, building on the 3.3% GDP growth recorded in Q2. As of September 17, 2025, the Atlanta Fed’s GDPNow model continues to forecast 3.3% growth for Q3.

September 16-17 FOMC Meeting:

The FOMC voted 11–1 to lower its benchmark interest rate by 25 basis points, setting a new target range of 4.00%–4.25%. This marks the first rate cut of the year after five consecutive meetings with no change. The lone dissent came from newly appointed Fed Governor Stephen Miran, who advocated for a 50-basis point cut.

As widely anticipated, the rate cut was driven by signs of a softening labor market, including slower job creation and a slight uptick in the unemployment rate, despite persistent inflation. Fed Chair Jerome Powell described the move as a “risk management cut,” signaling a proactive stance to mitigate downside risks to employment.

The FOMC released its updated Summary of Economic Projections (SEP), projecting stronger economic growth, lower unemployment and elevated inflation in 2026.  Key takeaways include:

1. Interest Rate Projections (Dot Plot)

• The Federal Reserve now anticipates a total of 50 basis points in cuts by the end of 2025, followed by an additional 25 basis point cut in 2026.
• This would bring the federal funds rate target range to 3.50%–3.75% in 2025 and 3.25%–3.50% in 2026, implying three 25-basis-point reductions by the end of 2026.
• Median year-end rate forecasts:
  • 2025: 3.6% (down from 3.9% in June)
  • 2026: 3.4% (down from 3.6%)
  • 2027: 3.1% (down from 3.4%)
  • Long-run neutral rate: 3.0%

2. GDP Growth Projections

• 2025: 1.6% (up from 1.4% in June)
• 2026: 1.8% (up from 1.6%)
• 2027: 1.9% (up from 1.8%)
• Long-run growth rate: 1.8%

3. Unemployment Rate Projections

• 2025: 4.5%, unchanged from June
• 2026: 4.4% (down from 4.5%)
• 2027: 4.3% (down from 4.4%)
• Long-run estimate: 4.2%

4. Inflation (Headline PCE Price Index) Projections

• 2025: 3.0%, unchanged from June
• 2026: 2.6% (up from 2.4%)
• 2027: 2.1%, unchanged from June
• Long-run target: 2.0%

Market Analysis:

Equity Market Weekly Recap

Equity markets closed the week with strong gains, led by the tech-heavy Nasdaq and small-cap stocks. The rally was fueled by the Federal Reserve’s first interest rate cut in nine months, growing optimism for additional cuts, encouraging progress in U.S.–China trade negotiations, and robust performance in the technology sector.

• Nasdaq surged 2.0% to close at 22,631, marking its strongest weekly performance and third consecutive weekly gain.
• S&P 500 rose 1.2% to finish at 6,664, also posting its third straight week of gains.
• Dow Jones Industrial Average added 1.0%, ending at 46,315, with its second consecutive weekly advance.
• Russell 2000, representing small-cap stocks, gained 2.2% and hit a record high on Thursday, its first since November 8, 2021.

Treasury Market Update

Treasury yields steepened slightly last week, reflecting a modest decline in short-term rates (up to 1 year) and a slight increase in longer-term maturities:

• 2-year yield: 3.57% (+1 bp)
• 5-year yield: 3.68% (+5 bps)
• 10-year yield: 4.14% (+8 bps)

Rate Cut Expectations

Markets are currently pricing in two quarter-point rate cuts in 2025, totaling a 0.50% reduction in the federal funds rate:

• The first cut is expected in October, with a 93% probability.
• A second cut is anticipated in December, with an 87% probability.

Looking ahead to 2026, markets are projecting two additional cuts—one in April and another in July—as part of a continued easing cycle.

Next Week’s Economic Calendar:

Next week features a busy slate of economic releases:

• Wednesday:
  • Weekly mortgage applications
  • August new home sales
• Thursday:
  • Weekly jobless claims
  • Final Q2 GDP
  • August durable goods orders
  • August existing home sales
• Friday:
  • August personal income and consumption along with the PCE, the Fed’s preferred inflation measure
  • September University of Michigan Consumer Sentiment Index

Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California

Thomas McCullough
EVP of Commercial Bank of California

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