Fed Pivots, Bonds Celebrate

This past week the good vibes in the financial markets continued. Interest rates hit their best levels since the Summer and continued their historic run lower. Let's discuss what happened and look at the week ahead.

Fed Delivers Early Christmas Gift

"Rate cuts will be a topic of discussion going forward" Fed Chair Jerome Powell.

The main event last week was the Fed Meeting which included their decision on interest rates, and their updated forecast on the economy. The release of the statement, and the subsequent press conference could not have been more bond friendly as interest rates tumbled throughout the day.

Here are the main takeaways from the Fed Meeting:

1. Inflation is headed lower.

2. The economy is slowing with no recession on the horizon.

3. The labor market will remain somewhat strong.

4. The next move by the Fed is a rate cut.

How soon will the rate cut come? Well, as we discussed last week, history has shown that the first rate cut comes about 8 1/2 months after the last hike; setting the stage for an April cut. Heading into yesterday's meeting there was virtually no chance of a rate cut in March. Now there is a 70% chance the Fed will cut rates at the March meeting.

Three is a Charm

"Fed doesn't need a recession to cut rates"...Powell.

The Federal Reserve also added an additional cut to their outlook, and now sees three rate cuts next year. Fed Funds Futures, which price in the probability of Fed activity, are pricing in as much as six .25% cuts bringing the Fed Funds Rate down to 3.75% by Dec 2024. The incoming data will determine whether the Fed must cut more than presently forecasted.

What we learned over the last few weeks is what happens all the time in financial markets...things can change very quickly. Back in October when the 10-year note was yielding over 5%, there was no one on the planet forecasting that the 10-year yield would touch the threes before the end of the year...yet here we are.

4%

As of this press time, the 10-year note is yielding beneath 4% which until now, has been a floor of yield support preventing rates from getting better. If the 10-yr Note can remain in the 3's for a few days, 4% could suddenly turn into a ceiling of yield resistance, which would mean 4% would be about as bad as rates could get...quite the change of fortune.

Bottom line: The Federal Reserve has finished hiking rates, and their next move will be a cut. This removes uncertainty from the financial markets. At the same time, long-term rates like mortgages have started repricing this reality over the last few weeks. We can't expect rates to continue to move in a straight line lower, but this last week was an incredible development for mortgage and housing and should give us a better Spring than we could've imagined just weeks ago.