"You can't connect the dots looking forward; you can only connect them looking backward," – Steve Jobs at my Stanford B-school commencement speech in 2005.
With apologies to maybe the greatest technologist of all time, I would argue that the Fed’s blue dots could at least be better at connecting the dots without waiting for the benefit of hindsight.
That June’s job data just got revised to losses of 13k. I wonder how many FOMC members would have still projected no cuts by year end?
I’m no Steve Jobs, but we have at least one thing in common…neither of us went to Stanford, so I wasn’t actually in attendance at that commencement speech. Just a dumb state school kid here. My commencement speech was given by Bill Cosby, which hasn’t aged quite as well…
Last Week This Morning
Jobs Revision
The economy added 911k fewer jobs than originally reported between April 2024 and March 2025. If only someone had warned everybody about those pesky inaccurate job numbers…
We went from 147k to just 71k per month. And that was before immigration policies impacted the monthly breakeven number. “Strongest, most resilient labor market in history!”
The real market mover last week was the Initial Jobless Claims, which hit its highest level in four years. Markets interpreted this print as a potential indicator that “slow hiring” is evolving into “firing.”
Bloomberg’s Conor Sen had a good piece on the state of the labor market(1).
I think the Fed is already behind the curve. Not because they need to stimulate the economy, but because they need to stop applying the brakes. Quickly. They aren’t that far behind, just enough that they need to move now to make sure employers don’t transition from not hiring into firing. The longer they wait, the more they will eventually have to cut.
And for those arguing that the Fed shouldn’t have cut last year…you still so sure?
FOMC Meeting – Wednesday
The Fed is definitely cutting 25bps but is definitely not cutting 50bps. That would spook the long end of the curve and run the risk of unanchoring inflation expectations.
If the labor market transitions from low hiring to actual firing, inflation expectations will take a back seat to saving jobs. Until then, the Fed is trying to thread a needle.
The FOMC projection dots are borderline worthless. At the June meeting, 7 members projected NO CUTS by year end. How do they defend that this week? Either they dissent, claim the world changed dramatically since then, or admit they were wrong. How is it that this dumb state school kid is better at projecting rate cuts than the pros? Nothing has happened in the last three months that can justify that big of a swing in projections.
While the dots are anonymous, we can reasonably guess at each member’s votes. Here’s Bloomberg’s Ana Wong’s expectation, which implies the median amount of reduction at 0.50% by year end. There’s only a 1% probability of FF north of 4% by year end.
For a fun time, see if you can pick out the ones positioning to be Fed Chair…
The market is probably more focused on the 2026 dots anyway. In June, the median projection was 3.625% (with one knucklehead in June projecting a single cut over the next 18 months…c’mon…think about your effect on Fed credibility). I think this likely drops to 3.375%.
Citi’s Chief Economist Andrew Hollenhorst was on Bloomberg TV last week and said he expects 5 consecutive 25bps rate cuts. That would put us around 3%, which most believe is approximately the neutral rate.
I agree with the sentiment, but once we reach 3.5% the bar will be higher for each additional cut. Cuts right now are still easing off the brakes, but at some point additional cuts become pressing on the gas. The Fed won’t want to accidentally press on the gas pedal, so it will become increasingly cautious as we get lower. We will still get there, but it will just take a while.
Here’s the visual I included last week to help illustrate the Fed’s approach in the year ahead.
Unless the wheels fall off.
If the Fed does cut at the next five meetings, or gets below 3%, it’s because things are going wrong.
For what it’s worth, our cap volume spiked last year once the Fed started cutting – I wonder if the same happens this year? I’m definitely hearing more of our clients choose floating on the expectation that it will be better than fixed over the next 3-5 years.
Floors for Thought
It might be too late to get a great deal on buying out a floor, but shouldn’t you still be negotiating it like anything else? A 3% floor for 3 years is about 1.06% of the loan amount.
Wouldn’t you ask about an extra $500k in transaction costs?
Would you have even signed the term sheet if the spread was 0.35% higher?
If only there was a place to get quickly get floor values…
(that’s from our website Excel Cap pricer download…just choose Floor instead of Cap…Cap and Floor Pricer)
The Week Ahead
It will be hard for rates to move much ahead of the Fed’s meeting. Sure, Retails Sales are important, but enough for traders to load up with conviction with a J$ press conference looming?
And obviously Eagles Chiefs rematch today, which gives me an excuse to relive the Super Bowl memories.
I didn’t check my phone a single time during the game so as not to jinx it, but my brother had sent this to me in the third quarter before the Chiefs had even crossed midfield.
And one more image that I didn’t personally take. My boys playing catch with an Eagles DB before the game…
BIRDS BY A MILLION!
(and no, I don’t want to talk about Drew Allar…)