Chair Powell delivered a notably more hawkish message this past week than markets anticipated. While investors were largely expecting a reduction in the Federal Funds Target Rate and a potential announcement signaling the end of quantitative tightening (QT), Powell’s remarks at the post-meeting press conference struck a more cautious tone. Most significantly, when discussing the possibility of a rate cut in December, he emphasized that it is “not a foregone conclusion – far from it,” underscoring the Fed’s continued vigilance on inflation and its readiness to maintain a restrictive stance if necessary.
Following Chair Powell’s unexpectedly hawkish remarks, the 10-Year Treasury yield rebounded from sub-4% levels, climbing above the 4.08% threshold—a level that had previously acted as both support and resistance throughout September and early October. This shift in price action marks a meaningful departure from the prevailing market view that lower rates were imminent. Should yields continue to rise, the next technical resistance is projected near 4.20%, aligning with the upper boundary of the current downward-sloping trend channel. Meanwhile, the S&P 500 retreated from its recent 6920 peak, closing lower for the week, as Powell’s comments signaled a potentially less accommodative policy stance ahead.
Powell’s shift in tone reignited market and policy discussions around the neutral policy rate, or natural rate of interest - commonly referred to as r-star. This rate represents the level at which monetary policy is considered neutral by the FOMC, striking a balance between economic expansion and contraction. Powell’s remarks underscored the diversity of views within the committee, noting that “there are people on the committee who have higher estimates of the neutral rate.” While estimates range from approximately 3.0% to as high as 3.7%, the current federal funds target range of 4.00% to 4.25% remains above these levels, indicating that policy is still in restrictive territory.
Continuing the theme of division within the FOMC, last week’s policy decision marked the third consecutive meeting with dissenting votes, with Miran advocating for a 50 basis point cut, while Schmid preferred no change. This divergence highlights the continued uncertainty within the committee, exacerbated by the ongoing government shutdown, which has led to a dearth of timely economic data. The lack of reliable information does little to bolster confidence that market sentiment and central bank perspectives will soon converge around a unified narrative, potentially delaying greater policy clarity and market stability.
From the Municipal Desk (with contributions from Ryan Riffe):
Jerome Powell's remarks and rising Treasury rates failed to spook the municipal market for what proved to be a steady Halloween week. The noticeable drop in supply from $18 billion to $8 billion helped municipals outperform US Treasuries. Even with Wednesday's knee-jerk rise in Treasury yields, demand for new issues negotiated and competitive deals remained strong. Many of these deals were not only oversubscribed but had to be repriced to lower yield targets. For the first time in weeks, the front-end of the municipal curve kept pace with the long end, possibly showing a revival in short-term demand. This was a positive sign considering inflows continue to favor intermediate and longer-dated funds. With moderate forward supply and improving year-end technicals, we believe the market will continue to have strong support. Despite this, we continue to trade cautiously as economic data remains limited. We look ahead to an increased new issue calendar of $13+ billion, which should be well received as November 1st reinvestment monies seek a new home.
30-Day Visible Supply @ $17.2 Billion
Weekly Calendar expected $13.7 Billion
2-YR Ratio @ 68%
3-YR Ratio @ 68%
5-YR Ratio @ 64%
10-YR Ratio @ 67%
30-YR Ratio @ 89%
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