Publications

The muted market impact following Powell’s stark message against setting interest rates “following the preferences of the President” likely reflects low confidence in the lawsuit’s prospects.

Elevated term premia likely driven by fiscal and institutional risks keep long-end yields high despite stable inflation expectations. Outside isolated episodes of turbulence, markets have reflected favorable conditions over the year and throughout the easing cycle.

While a highly divided vote is likely, we see little upside for the Fed in delivering a surprise pause. A key takeaway will likely be that the room for “risk-management” cuts has run their course and the Fed will pause early next year.

Alongside the uncertainty from the recently ended federal government shutdown, markets scaled back expectations of a deep, linear easing cycle. Uncertainty remains over the December Fed move, though a third “risk-management” cut still appears marginally more likely.

We expect most FOMC participants to conclude that downside risks to the labor market remain firmly in place and to support a second consecutive rate cut this week.

Treasury yields fell over the past month as futures almost fully price in a second straight rate cut next week, after Powell warned last week that the labor market may now be at a stage where “further declines in job openings might very well show up in unemployment.”

Powell described today’s move as “a risk-management cut,” with rising downside risks to the employment mandate making it appropriate to resume “moving in the direction of neutral.”