Latest / The Issue at Hand by Madison Investments / Market Brief: Fed Holds Rates Steady…Now What?
Transcript
- speaker-0: Welcome back to the issue at hand market brief. I'm Chris Alamon and I'm joined by head of fixed income Mike Sanders. Now before we get started, I just wanted to say one thing, Mike. Go Brewers. speaker-1: Obrewers, let's hope they close it out. Yes. speaker-0: All right, so the Fed just concluded their October meeting and it was largely what we expected. Heading into today though, I think the probability of a rate hike had fallen to less than ten percent. And I think that's a start change from a month ago where it was closer to seventy percent. I thought the probability change was kinda interesting. So I guess what I what we're gonna say is so what did we get? The Fed held rates steady. However, the drivers I think haven't really changed. So Mike, inflation is still well above target. The contributing factors like energy prices, Iran conflict, AI build out and tariffs are still there. They haven't subsided. So I guess my question to you is, was today's policy decision significant in any way? speaker-1: Think it was seeing you've set it up really well. I think it was significant in the context that inflation is above target, the labor market is stable, and the the last inf inflation print kind of in the inflation side was not great. And so the fact that you had all of that occur, and there was still no decision to increase rates and kind of punting, if you will, and asking for more information until the December meeting was it was interesting and and Borsh was asked that. I don't think he had a great answer on why they were punting. They just want to have more information and make a better decision. But the interesting thing is is you're only going to get one more CPI release before the December ninth meeting. And so what that's going to tell you, I'm not sure, but he at least as of right now is is want wants more information before he's willing to kind of push For more hikes. speaker-0: Yeah, I think that's what we can expect from Kevin Warsh. And and again, not trying to joke here, but I think it's also what we're expecting is the lack of commentary. So I guess I have to ask, did anything in his statement or his comments post did anything stand out to you? speaker-1: Yeah. Two things stood out to me. It was he made a comment about watching the rate market and how it's diverged from oil prices a little bit. we're back up to a one two in oil and you know, could have argued that a lot of the driver of the rate changes were because of higher energy prices, but we've kind of diverged from that 'cause we're we're we're gonna mount off the highs in terms of tens and thirties in terms of treasury rates. Great. And you also made a comment of the impact of the possibly higher rates on AI spending and there some impact there. And be I think, you know, there's been a lot of talk and, you know, we've been been kind of in that camp a little bit even that, you know, some of the AI spending is going to be insensitive to rate changes, higher rates. But he seemed to push back a little bit on that and connected the dots with a shift from maybe oil prices impacting rates to maybe, wider credit spreads and AI type names and and that part driving rate differences. speaker-0: Well, I know you had mentioned that I think in our last market brief. So I kinda wanna gauge what about the market reaction? So we're sitting here at four PM Eastern. Is this again something you expected or is it kind of telling you anything different? speaker-1: the market was, off a little bit. Rates were higher a touch before the meeting. you know, and we've accelerated, at least as of right now, in tens and thirties are a little bit higher. So it's a little bit of a steepening of the yield curves. I think because of you could maybe argue this was a little bit more dovish in terms of maybe some of the rationale pushing back on why he did look change rates and looking forward and what they're gonna focus on. different factors, et cetera, that maybe this is a little more dovish. and you know, if a dovish a dovish Fed in terms of rate changes, you know, is gonna push, you know, interest rates up up higher because there might be a perception that he's not gonna fight inflation as hard as maybe he would want to maybe that's you know, we'll we'll see over the next coming days and weeks exactly what how the market reacts, but that could be one interpretation of what we're saying right now. speaker-0: Yeah, I think that was mine. My initial reaction to to the movement post game, I guess, was that. So let's let me recap kind of what's been happening over the last month and then I want to get your take on it. I I kinda like what we've been doing. Interest rates further out the yield curve have become more volatile. I think I think the last time you and I talked at length about the drivers of long term rates like inflation, economic growth, fiscal deficits, et cetera. But I guess does today's pause does it do anything to alleviate pressure on the back end of the curve. 'Cause to me it kinda doesn't feel like it, but I kinda wanted to I wanna get your take on this. speaker-1: Not not really. The the interesting thing is though is that we are pretty significantly off the highs that we've had. I mean we were five thirty five area on tens, now we're in the low fives. We were at the five sixty five context, and now we're at five thirty three on thirties. So long rates have become more volatile, but we definitely are off our the highs of of of rates out the curve. and yeah, I don't know if if what was discussed today, will significantly change. I think you have to see the data come out and they have a sen like they said, they want to see more d information, more data and speaker-0: And then I get it. Yep. speaker-1: So I you know, I don't you know, again, we'll see over the next coming days and weeks on what exactly happens with the back end of the curve. There definitely seems to be maybe if it was, you know, people trying to make a quick dollar, you know, extending duration and buying long bonds. but we've s we're definitely off the highs and you know, but but yeah, a lot of the issues that we've had are still out there, right? Too much spending, elevated oil prices, but at least At the moment that doesn't seem to be as big of an issue as maybe it was, you know, maybe just even a couple, two, three, four weeks ago. speaker-0: L let's stick with that. one of the things that I wanted to talk about was also on I guess on the fiscal side. we have midterms coming up next week and one of the main issues on voters' mind is affordability. So is it realistic to think that there's an outcome in these midterms that could force the administration, I guess, to scale back some of its policies that have been driving up inflation? And I think along with that, as a bond manager, how do you think that do midterms even kind of factor into your thought process? speaker-1: Yeah, I don't think there's any real policy changes post the midterms will change a lot. I think there's the market's pretty much priced in what's gonna happen, and that's probably gonna be, Democrats getting more see the build the the amount, who knows? Yeah, that might market moving there. There's gonna be split government, right? Which is you could argue is usually good. and so we'll you know, we'll see how that works its way out. from a manager perspective. not really. it's really, really hard to, you know, gauge any of that. And, you know, again, I think generally speaking, a kind of both both parties having some control is usually better. I in a long problem than than maybe one having complete control and pushing through policies. But you know, it's not something that we are super concerned about or or, you know, watching closely just given seems given the affordability issues and other other issues in the economy it's speaker-0: They haven't subsided. speaker-1: it's gonna it's it I'd be of shock if if there wasn't, you know, a Democrat, you know, majority. speaker-0: Got it. Well let's wrap things up and let's get back to the Fed for a second. So I guess in the in the coming meetings we the expectation is for two, three more hikes in the next four meetings. Is that right? speaker-1: There's the market's pricing in high probability of a December move. So the ninth of December, I think is the date. And then two were in twenty seven. So three total is what's getting priced in at the moment. roughly in line with quite honestly what was before the the Fed meeting. speaker-0: Okay. Well then let's wrap it up. Doug, do you have any final thoughts? If not, I had a question for you personally. speaker-1: No, no not not really. speaker-0: So I I guess my thing was after listening to the press conference, one of Walsh's comments was that he was going to cut back on the number of meetings where members vote on rates. For me personally, I th took that as a little bit of a surprise. So is this kind of w what we should expect for Walsh's tenure or was this a little bit of a shock to you as well? speaker-1: there was there was chatter in the market. It's a good question. There's chatter in the market about the Fed reducing the number of meetings over the next couple of years just as I don't think he likes getting up there and talking about some of this policy, if you will. so you it was not shocking that there was some adjustment to it 'cause there was discussions that I had read. you know, I think it was if I if I remember this quote Exactly of how this is gonna work, but I think there's gonna be you know you have eight meetings and then one of those eight next year will be different. Won't be like a rate setting meeting, if you will, and then the following year in twenty eight it'll be six of the eight will be rate setting meetings. so it'll be, you know, we'll see how it plays out. I I my guess is that that other meeting won't be until the back half of the year. So we'll have some time probably for for everybody to ask more questions exactly what he meant. in terms of the outcome of that other meeting. But yeah, it was definitely not a shock, but definitely something different. speaker-0: Yeah, definitely. Well, thanks again, Mike, for joining and one last flood. Go Bruce. speaker-1: Burst. speaker-0: Now you can access additional information and disclosures at Madison Investments.com. And if you like what you hear, please don't forget to click subscribe wherever you get your podcasts. Thanks and take care.