Fed Caution, Labor Focus, and MUNI Momentum Ahead of October Meeting

• Fed Reserve Bank of SF President Mary Daly indicated further rate cuts are likely needed, but the US central bank should approach those cuts with caution.  She told reporters that she thought “likely policy adjustments will be added, as the FED works to restore price stability while providing needed support to the labor market.”  As we have reported, the labor market is taking center stage and has outshone the tariffs currently in effect.  We can expect to see a lot of news surrounding this leading up to the October 29th Fed meeting.
• As we know, the Federal Reserve has a new policymaker appointed by President Trump.  He laid out his argument yesterday for lowering rates aggressively over the subsequent several meetings, and this makes him an “outsider” in the FED.  In his first policy speech, Miran argued that the neutral rate of interest has been pushed lower by tariffs, immigration restrictions, and tax policy.
• Bowman warned the FOMC may need to lower rates “more quickly” in the months ahead to address the labor markets.  Why are we stressing this?  We have said for the past three months that labor markets will take center stage; tariffs have now subsided, and labor is the new hot button.  We are seeing labor slow; people are neither firing nor hiring. I suspect we will continue to see these types of talks in the upcoming months and into 2026.  We are in a pattern here, and that pattern is lower rates, higher pricing, and paper drying up.
• Bessent expressed disappointment in Powell that he has to set a clearly established agenda for cutting rates.  Bessent indicated that rates are “too restrictive and need to come down” and told Fox Business that he is surprised Powell has not put forth a plan to cut another 100 to 150 basis points before the end of the year.  This is a bold claim and an aggressive cutting pattern, in our opinion.
• We reported last week that investors added $2.37 billion to MUNI bond funds; this week, another $1.14 billion has been added.  We suspect this trend will continue for the next couple of weeks, leading to stabilized pricing. We have seen a +4 bps move overall this week, with the shorter end of the curve getting hit the most. We have indicated in our outbound messaging that we thought there would be a slight pullback in pricing, and it has happened.
• The White House budget office is again telling federal agencies to prepare plans for mass firing during a possible government shutdown.  This move would represent a substantial exclusion beyond regular shutdown protocols in recent years, which are typically not seen during a “budget shutdown issue” as we are seeing now.  This will have an impact on job numbers when they are released, should this proceed, adding to the notion of a weak labor market.
• Investors have poured money into MUNI bond funds this month in anticipation of the rate cut we have seen.  I suspect this will continue to happen, given the anticipation of future cuts for the remainder of this year.  The bottom line is that we will see yields overall tick lower (I think we will see a +5bps across the curve within the next week), and buying paper in here should pay off for the investor.

Bottom line: We have seen yields across the curve drop, around 25bps on the longer end and around 10bps on the shorter end. We do expect yields to move up slightly and have seen this move this week. We expect yields to move up another 5bps until “settling in” and then all eyes will start to turn to the October FOMC meeting.