Stocks closed higher yesterday, with the small-cap Russell 2000 leading the gains with 0.67%. The S&P 500 and Nasdaq, which have made numerous all-time highs this year, were up 0.14% and 0.27% respectively.

Yesterday, Cleveland Federal Reserve President, Beth Hammack, said that the U.S. economy is "really healthy." She also cited a strong labor market, which is "right around that maximum employment side of our mandate," but said that "inflation, which has made progress from above 7% right in the height of the pandemic, to below 3%," has been "hanging out in that same range below 3% for some period of time, and so I think it's important that we wait and see how all the new policies that have been put forward are going to impact inflation."

I understand the justification for keeping rates unchanged. The economy is doing well. Although, inflation is still a bit too high.

But one could argue that with core PCE inflation (the Fed's preferred inflation gauge) at 2.6%, which is approximately 1.78 percentage points below the Fed Funds midpoint rate of 4.38%, rates should be cut. That's because if one were to assume that 100 basis points above inflation is the natural rate (aka the neutral rate), to allow for growth, but keep inflation in check, then with core PCE at just 2.6%, it suggests interest rates should come down to 3.6%, which is 78 basis points lower than where they are now.

As it stands, the Fed has already said they expect to cut rates twice this year (presumably by 25 basis points each). And with only 4 FOMC meetings left (July 29-30, September, October and December), half of those meetings should see cuts. And even if they did cut by 50 basis points, putting the midpoint interest rate at 3.88%, it would still be about 28 basis points above the supposed neutral rate, allowing the Fed room just in case inflation does tick up a bit.

We'll get another look at inflation today (Tuesday, 7/15), with the Consumer Price Index (CPI, retail inflation), and then again tomorrow (Wednesday, 7/16), with the Producer Price Index (PPI, wholesale inflation).

It's unlikely the Fed will take any action on rates at the next meeting in July. In fact, the CME's FedWatch tool only places a 4.7% likelihood of a rate cut in July. However, that increases to 62.1% for September, 83.9% for October, and 95.5% for December.

Either way, if progress on inflation continues (and we'll know more in the next couple of days, and coming weeks), that could increase the chances for a rate cut sooner rather than later.

There were no economic reports on the docket yesterday.

But today, along with the CPI report, we'll get the Empire State Manufacturing Index.

Earnings season officially begins this week when Alcoa reports on Wednesday after the close. But it has already unofficially begun. And even prior to tomorrow's Alcoa kickoff, we'll get a parade of big bank earnings today, which includes JPMorgan Chase, Wells Fargo, BlackRock, and Citigroup. We'll also get more tomorrow with Bank of America, Morgan Stanley and Goldman Sachs on deck to report.

Earnings season is always an exciting time since stocks typically go up during earnings season.

And I'm expecting another solid earnings season this time too.

See you tomorrow,