September 19, 2024 Headlines

The Treasury curve is steeper this morning after yesterday’s Fed decision.

The 2-year/10-year spread is 6 basis points (bps) wider to 0.15%. Less than three months ago, that metric was at -0.50%, but a lot has changed since then. Back in June, the FOMC median forecast was for one 25 basis point rate cut in 2024 with another 100 bps of cuts in 2025. Yesterday, the Fed cut the fed funds rate by 50 bps and forecasted a total of 200 bps of cuts through the end of next year. There were plenty of questions about the market reaction to the decision, which included selloffs in both Treasuries and stocks.

We typically urge caution in paying too much attention to initial market reactions to such events, but there were a few things worth noting amid yesterday’s noise. First, this was a divided committee. There was only one official dissenting vote from Governor Michelle Bowman, who wanted a smaller 25-bp cut (first dissent from a Governor since 2005). However, when you looked at the updated dots, which provide each of the 19 FOMC participants’ forecast, 9 of the 19 members projected 75 bps of cuts in 2024. With only three FOMC meetings left this year (including yesterday), that implies 25-bp cuts at each meeting. With the exception of Bowman, the other voting members within that group of 9 chose not to dissent, which likely means they weren’t convicted enough either way to go against what Powell clearly wanted to do. Beyond this point, the median dots show just 150 bps of additional cuts through next year, which is less than what the market had priced in recent days/weeks. That, combined with the fact that the official statement and Powell’s press conference were relatively optimistic about the economic forecast, likely explains the selloff in long-end yields that is continuing this morning.

This morning’s data was better than expected, with initial jobless claims falling to 219,000. This was the lowest level of weekly claims since mid-May. The Philadelphia Fed survey surprised to the upside, including an increase in employment and prices paid/received.

Jason Haley
Chief Investment Officer