This commentary follows the FOMC's update and is TreasurySpring's capital market experts, Henry Adams and Nigel Owen’s opinion, and does not constitute legal, investment, or other advice.
Trade policy uncertainty is reducing from the heightened levels in the early days of Trump’s presidency, while economic policy has seen few surprises.
Consumer spending climbed an additional 0.7% in August, well ahead of the expectations of many who publish forecasts.
Wage growth has cooled but remains above an already high inflation rate – at 2.9% that is well above the 2% the Fed is targeting.
Unemployment is at a four-year high, as is the 200,000 shortfall between the number of people unemployed and the number of jobs available.
Any continued cooling of the labor market without support would be a worry, but inflation still feels like it has a part to play and needs to be controlled. Ideally, this could happen without having to increase rates, as that may cause the economy to cool, increasing the risk of stagflation.
There is still a degree of volatility coming through with tariff negotiations still not complete, including some with the larger trading partners, so the Fed forecast for the PCE Price Index at 3% has an upside risk.
There has been a change. It’s not a drastic one, but expectations are for rates to move lower sooner. However, the spread of expected rates has widened, which shouldn't be that surprising given the ongoing volatility we are seeing and the ‘two-sided risk’ Powell referred to.
The market is not expecting a huge shift, given how certain the market was that the Fed would cut at this meeting. CME FedWatch is indicating we should expect two consecutive 25 basis point cuts in October and December, which would see us at a range of 3.5% to 3.75%.
There has also been a lot of focus on the long end of the curve in recent months. For treasurers, the cost they have to pay over the risk-free rate is just as important and, positively, we have been at or close to long-term tights in spreads for some time now, and we've seen strong demand. Increased benchmark yields mean spreads can remain tight, but investors can still get good nominal returns, which should see demand remain strong.
Despite the cut, the benchmark rate remains higher in the US than Europe and the UK for now. Investors will continue to demand US paper. Borrowers may want to borrow at lower nominal yields in Euros or Sterling, but those markets are starting to price in the bottom of the cutting cycle, while it feels like we have plenty more wood to chop in the US yet.
The Dollar weakened between the last two Fed meetings, but the post-meeting reaction this time was to buy the Dollar, with a similar move versus both the Euro and Sterling. But the fears around inflation and its risk for the US economy, especially if it were to come alongside a further slowing jobs market, mean the Dollar is far from out of the woods yet.
“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. While the unemployment rate remains low, it has edged up, job gains have slowed, and downside risks to employment have risen. At the same time, inflation has risen recently and remains somewhat elevated. In support of our goals, and in light of the shift in the balance of risks, today the Federal Open Market Committee decided to lower our policy interest rate by 1/4 percentage point.”
“In the near term, risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. With downside risks to employment having increased, the balance of risks has shifted. Accordingly, we judged it appropriate at this meeting to take another step toward a more neutral policy stance.”
Source: https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20250917.pdf
*TreasurySpring’s blogs and commentaries are provided for general information purposes only, and do not constitute legal, investment or other advice.