4 Key Takeaways From the Fed Meeting and What to Expect on Rate Cuts Now
Here's how Powell’s final months as Chair could shape interest rates and markets, why you should own these Treasuries, and why 'flatteners' are back.
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Markets didn’t do much during Fed Chair Powell's press conference following the latest FOMC meeting. That partly understandable because:
- He won’t be Chair much longer, and the “hawkish” FOMC statement didn’t last through the press conference.
- A lot of the questions got the “will not answer” response, which seemed about right.
4 Takeaways From the Latest Fed Meeting
While we can all take away what we want from this meeting, my takeaways are:
1. Powell demonstrated, I think quite well, that the vast majority was in favor of doing nothing. Effectively, the Fed is not succumbing to pressure and is independent. In my mind, that sets him up to cut if he deems it necessary. Basically, this meeting was a “business as usual” message and the next meeting could be “business as usual, required us to cut.”
2. Jobs. In Monday's article we highlighted concerns about the JOLTS hires and quits rate. Powell mentioned other signs of ongoing weakness in the labor market. He even said if it comes down to GDP (strong) and Jobs (weak) they will do what jobs require as the data are more accurate (and probably more relevant).
3. On inflation, we also recently discussed Truflation and real-time housing data, pounding the table that the official data are lagging – AGAIN! Powell brought up his view that the tariff inflation has largely worked its way through the system.
4. We can all be nervous by recent rises in commodity prices – but that has the potential to be “transitory.”
My Rate Outlook Post Press Conference
- I still see 75 bps in cuts by the September meeting. I now think we will get 25 bps during Powell’s tenure – likely April, but don’t completely discount March.
- Own 10’s: They should drift to sub 4%. Whether it is Rick Rieder or someone else that's the new Chair, expect the Fed and Treasury to work more closely and on a more timely (less prescribed) basis to influence the longer end of the yield curve. Housing affordability is impacted by 10-year yields.
- Anything done to artificially keep 10’s lower, is probably “bad” for the dollar, but after recent comments by President Trump we all know “a weak dollar is a good dollar.”
- Go ahead and put on flatteners (2's vs 10's might make the most sense, though need to look at carry, etc.).
The market is not seeing it this way, but let’s see how the market behaves over the next few days, as we really think about where we are in this cycle. Can we cut into strong GDP? I think the answer is yes, unless jobs show some surprising strength across the board (I think NFP will be strong, but away from that, weakness remains the story).
Neither the Fed (nor the bond market) will do anything to derail stocks in the near term.
Stay warm! Or better yet, find a reason to get somewhere warm!
