Markets in Holding Pattern as Fed Eyes Cuts & Government Remains Closed

• As we have discussed, MUNIs for September finished strong.  Many are calling for the balance of the year to remain firm because most of the record surge in supply is beginning to dry up.  We have reported all year about the glut of supply hurting pricing while moving yields up; we are now starting to see a slowdown in the primary markets, which should help pricing.  I do not think we will see another 25bps move to the downside this month, but 5-10bps is not out of the question.
• The FED showed a willingness to lower rates further this year, but many have expressed (as we have reported) caution driven by concerns over inflation at their policy gathering last month.  Most have judged that it would be appropriate to ease policy further over the remainder of this year, but with the same breath, they expressed concerns over inflation.  I suspect, along with others, we will see at least one more move down this year.
• T-bills are “stuck in a rut,” but traders are preparing for what could be a whirlwind of action once the US Government ends its shutdown. We have reported that economic data will be “slow” to come out (basically none) while the Government is shut down, which will add difficulty for all aspects of the FED to make rate decisions. Furthermore, the expected volatility in US T-bills has cratered since the closure started last week.  The bottom line here is that once the Government opens, expect volatility in all fixed-income markets.
• I have seen the term “low hire/low fire” used in the US labor market.  This terminology is leaving millions on the outside looking in, and it is not just recent college graduates who are struggling to find entry-level positions.  More than a quarter of the jobless have been out of work for nearly one and a half years, marking the highest share since the mid-2010s, excluding the pandemic.
• With Powell’s term coming to an end in May 2026, President Trump is making no secret of his desire to shape monetary policy.  I suspect, along with others, that this will continue through May of next year, creating opportunities in most markets.  I suspect Powell will leave in May 2026. Whoever takes the helm will know what they are getting themselves into and will have to endure pressure from the administration if they do not “adhere” to reducing rates.
• We have been discussing Chicago for quite some time. Mayor Brandon Johnson said this week that the budget proposal he plans to unveil next week will reflect potential federal funding cuts.  The first-term mayor was already facing a $1.15B deficit for 2026 before the Trump administration ramped up funding freezes and threatened to reduce the money flowing into Chicago and other major cities.  If you own debt in Chicago or similar cities that are on the radar of the current administration, we would advise you to review the credit ratings and insurance.
• The September FOMC decision seemed dovish on paper, with the median participant penciled in another 50bps cut for this year as we have been stating.  This comes even as growth and inflation forecasts have been revised higher.  I suspect the minutes for October will sound more hawkish with several officials pushing back at the pace of cuts for the balance of this year; this could push yields slightly higher from here.
• After the September meeting, participants viewed unemployment risks as skewed to the upside, with fewer participants seeing inflation risks as dominant.  Powel confirmed this as well, stating he sees “downside risks to employment having increased, the balance of these risks (inflation and employment) has shifted.”  I have attached a graph to show how they correlate.
• Historically, Washington, D.C., has been “recession-proof,” but the government shutdown and the current administration threaten to jeopardize this status.  As the shutdown nears the one-week mark, both sides of the aisle are at a stalemate over health care subsidies in a plan to fund the Government.  As of today, 750K government workers have been placed on unpaid leave of absence, and the Trump administration is considering not paying them back when/if they return.

Bottom line:

Rates have been steady this week, and as we go into a long weekend, that is to be expected.  With news coming slowly from the Government (or no news at all), it will be hard to gauge how the FED will react at the next meeting.  If the FED simply does not have data to make decisions, they will pause, in my opinion.  With this said, many, including me, think the Government will reopen soon, and the data will flow.  We do see one rate cut this year and perhaps two, with the next one coming this month. If you are buying longer-dated paper, seek quality. We believe yields will continue to grind a bit lower from here, but getting through a 4% YTW on longer-dated MUNIs will be tough. Therefore, we think we will stall around a 4.15% YTW on the long end for now.