A Cut This Week But None Next Year?

If Penn State were in charge of the FOMC Chair search process…

PSU AD Kraft: “Powell, you’re fired.” This kicks off two months of bumbling and rumors and confusion.

Miran: “I’ll be Fed Chair! I’ll be Fed Chair! Pick me! Pick me!”

PSU AD: “I can’t pick you, this is my big moment to shine. I need a splashy pick!”

PSU AD: “Scott, you wanna be Fed Chair?”

Bessent: “I’m kind of busy at the moment, but I am flattered by the offer.”

PSU AD: “Larry, you wanna be Fed Chair?”

Summers: “That could be…problematic…right now.”

Rumors swirl that maybe PSU can lure Greenspan out of retirement (and yes, Greenspan is still alive…99 years young). Or that Bernanke has interest. If Fed officials had sports agents, they’d all be getting paid huge right now.

Meanwhile, Miran rallies the troops to voice their support for him, hoping for a Hail Mary. Kugler steps down. Bostic steps down. Roles are being filled left and right, except for the Chair.

Kraft and Mitt Romney reach an agreement in the dead of night. It will be such a headline grabber, something for the PSU AD to hang his hat on! PSU leaks the news, desperate to provide some certainty to anxious Fed officials. The market likes it! But then Romney’s family starts to work him. His church starts to work him.   Paul Ryan cautions him – this position ain’t what it used to be!

Romney changes his mind. He backs out. The PSU AD looks clownish.

But right before he has to settle for Miran, he reaches a deal with Kevin Hassett. That’s a great pick! A very respectable choice that would have been well received on Day 1. Months of speculation and muddy waters and rumors and reneged handshake agreements make it feel like Hassett’s not a first choice, but in reality, was on the shortlist from the beginning.

Last Week This Morning

• 10T: 4.13%   
• 2T: 3.56%
• SOFR: 3.92%
• Term SOFR: 3.78%
• ADP Employment: -32k vs. 10k expected
• Inflation was at or below expectations, paving the way for a cut this week
• UMich Consumer Sentiment rebounded slightly
  
  

Fed Meeting Wednesday – A Hawkish Cut

Markets have an 87% probability of a 25bps rate cut this week. If the Fed disagreed with that sentiment, they would have signaled by now. If they do, I will have correctly predicted the amount of cuts and one of my employees will owe me money.

This decision is very unlikely to be unanimous, however. Recent Trump appointee Stephen Miran is likely to dissent in favor of a larger, 0.50% reduction. 

Conversely, as many as five other voting members have expressed concern about reducing rates in the face of above-target inflation. Since 1990, there have only been 9 meetings with at least 3 dissents, the last coming in 2019.  

Rate cuts over the last year have been about easing off the brakes rather than pressing on the gas pedal. With each additional reduction, however, the Fed gets closer to a level of rates that could accelerate the economy.  With inflation already running above its 2% target, and tariffs keeping prices elevated, several Fed officials have called for patience. 

To minimize dissents, Powell may agree to hawkish language that suggests an extended pause to start 2026. I think we might see rates rebound after his Q&A as he reminds everyone that the Fed was on hold the first 8 months of each of the last two years and maybe we shouldn’t assume 2026 will be different.

There are several significant FOMC events in 2026 that could lead to a volatile year for interest rates. 

• Trump is announcing Fed Chairman Jay Powell’s replacement in the coming weeks, most likely the Director of National Economic Council, Kevin Hassett.
  • Powell’s term as Fed Chair doesn’t expire until May 2026, so markets will have to decide whether to pay more attention to Powell or Hassett through May.
• At that time, Powell will step down as Fed Chair but will still have two years remaining on his original 14 year Board of Governors appointment. Powell could choose to remain on the Board of Governors and have a vote at each FOMC meeting until his term expires in 2028. 
  • The last Fed Chair to step down as Fed Chair but remain on the Board of Governors was Marriner Eccles in 1948.  If Powell feels Fed independence is jeopardized, he is more likely to stay.  
  • On January 21st, the Supreme Court will hear oral arguments in Trump v Cook to determine if President Trump has the right to remove a Board of Governor. This is the single most important Fed event in 2026.
    • Firstly, we can’t have presidents attacking Fed independence.
    • Secondly, If Cook is ousted, and if Powell leaves the Board in May, Trump appointees will have a clear majority on the FOMC voting committee. Markets will expect lower rates in 2026.
      • Cook’s ouster could increase the odds Powell sticks around to avoid giving Trump the clear majority

Futures markets put the odds of at least two more cuts in 2026 at 75% and a year-end 2026 implied 10 year Treasury yield of 4.20% (blaze).

2024: 1.00%

2025: 0.75%

2026: 0.50%?????

The labor market will dictate whether the Fed needs to transition from easing off the brakes to pushing on the gas pedal.

The Week Ahead

Other than the Fed meeting, I am trying to track down James Kyger and Kyle Henson. Both were employed for me seven years ago when we made a wager on Tiger Woods majors. I gave them six full seasons for Tiger to win four more majors. He had recently won the Masters for the fifth time, but his first major in 11 years. They thought he would continue winning, but I knew how brutal getting old can be…because…well…me.

I got my calendar reminder this week. James and I stay in touch, he just doesn’t like to pay off wagers. And Kyle went to the University of Michigan and got his PhD in Economics.

I will shame you guys mercilessly until The Real Boss™ gets her money…