Fed Cuts 25bps; Traders Now Betting on 50bps More as Labor Weakens and Inflation Holds

• Chicago is lending cash to its underfunded pensions so they have enough money to avoid asset sales to cover retirement checks as they wait for property taxes to come in after a computer issue delayed collections.  We have discussed the Chicago BOE paper before; this is a direct impact on how those bonds are paid.  We have advised that, should you hold this debt, it would be wise to discuss with our team the attributes of the structure and how that structure is impacted by tax collections (or the lack of) on an annual basis. 
• As it relates to jobs, I suspect the term will be “jobs have slowed, but unemployment remains low” and “inflation remains slightly elevated” in the report today.  Again, I think Powell would not cut rates if there were not so much pressure on him by the current administration to do so. 
• Global inflation is diverging, but the direction of interest rates is converging, which is down.  In the US, inflation remains above target, and as we know, the target is 2%, and has been 2% for years.  Euro area inflation is near target with a rate cut in December, while China’s deflationary pressure will prompt its banks, I suspect, to cut soon. Global inflation, according to Bloomberg, is slowing to about 3% for the 4th quarter in 2025.  Most of this global slowdown is driven by emerging markets.  What does this mean for our markets?  Most likely, if we continue to see “global inflation” slow, we will see US inflation slow at a rapid pace, meaning additional cuts in 2026.  
• Trump’s economic advisor Stephen Miran will be joining the FED board after the Senate confirmed him to the post in a vote last night.  This will allow him to attend the FED meeting this week in time for a crucial FED vote regarding rates.  Republicans “fast-tracked” the approval of Miran’s nomination, with Trump pressuring the central bank to cut rates. 
• We all know the FED has had two mandates: “price stability and maximum employment,” and this might be supplemented by a “third mandate” to pursue moderate to long-term interest rates, which was cited by Miran.  The mention of the “third mandate” has sparked debates on what exactly this means –  it could be a sign that the administration intends to wield monetary policy to influence longer-term bond yields.  Bottom line, with the new appointee, I suspect he will pressure the FED board to lower rates further.

As we know, the FED lowered rates yesterday .25bps, and penciled in two more reductions this year following months of pressure from the current administration. Powell, at this point, is pointing to growing signs of weakness in the labor markets, as well as referencing that CPI numbers are steady. We have seen yields drop 32 bps over the last 12 trading days, and they seem to be continuing to drop slightly. We are somewhat surprised by the large run-up in pricing and expect a slight pullback in prices over the next week. With that said, it is clear rates are on the move, and the next several moves will be down. If you are buying paper here for the longer haul, focus on longer-dated securities with call protection, as we feel we have another decline of 50bps to go with yields headed lower.

As always, we will continue to keep you updated on FED moves and how they impact your bond portfolio. We are always open to questions and welcome your thoughts/questions.