We were in Cabo last week. It was 80 degrees and sunny every day. As we were watching the weather reports, I asked…nay begged…to extend another week. The Real Boss™ said no because our youngest has school. “But it will be cancelled!” North Carolina closes school for days on the mere threat of snow.
Nothing I tried worked.
We drank coffee and watched the sunrise in shorts…and then landed to freezing temps and ice. The windchill is 6 degrees and I am cranky. The Real Boss™ is going to get a lot of Cabo weather updates this week. I might even have son mention it to her while he sits at home.
Last Week This Morning
10T: 4.23%·
2T: 3.59%·
SOFR: 3.64%·
Term SOFR: 3.67%·
FOMC – United We Stand?
Trump’s gonna announce the next Fed Chair right before Powell speaks on Wednesday, right? Kneecap him and make every question about his replacement rather than rates.
Rick Rieder has surged into the lead, while Hassett has dropped to just 6%. Warsh continues to surprise me as a leading candidate given his hawkish tendencies. Then again, he’s married to Jane Lauder, heiress to the Estée Lauder Companies and…long-time family friends of the Trumps.
For 2026 monetary policy, the next Fed Chair is not a huge deal. They will replace Miran, who is already voting for 2% interest rates. The next Fed Chair won’t be more dovish than Miran. Whether Trump successfully outs Cook and Powell matters much more.
Last week’s Trump v Cook Supreme Court arguments looked a lot like Seattle dropkicking the Niners - it sure sounded like Cook isn’t going anywhere. And like the Seahawks running it back a second time with the same result, this suggests Powell might be equally as successful in his stand against the DOJ.
I’m sure Cook will vote for lower rates if she believes it’s the right thing to do, but I have to think her own bar to lowering rates has increased with Trump’s attacks. The irony of Trump accusing Cook of the very thing he has been accused of doesn’t get enough attention (here).
With Fed independence under attack, I wonder if a unanimous vote is more likely this week? Waller and Bowman are the two Trump appointees that I could see sending a message by voting for a pause. Miran may still vote for a cut, but his term expires this month, so it doesn’t count anyway.
Trump’s attacks probably raise the bar for cuts. If Trump wants rates lower, and Trump is attacking Fed independence, and you work at the Fed and don’t love being attacked…another case of Trump shooting himself in the foot.
Wednesday is an off meeting, meaning we won’t get updated forecasts (SEP). Last month, most members forecasted Fed Funds finishing the year between 3%-4%. We will get two more jobs reports and inflation reports before the March meeting, so that could be much more exciting.
Rates
SMBC research suggests that a 3% Fed Funds landing spot implies a 4.10% 10 Year Treasury. That implies:
Sub 3% FF pushes the T10 below 4%
Above 3% FF means the T10 moves toward 4.5%
We should get used to a range-bound 10 Year Treasury.
“China’s dumping Treasurys!” – guy that reads headlines buried too deep for most people to ever get to, making him sound smart. But they aren’t. Yes, China’s official holdings dropped $6.1B last month, which gives the media something to panic about.
But as I’ve been writing about for years, China simply disguises its holdings via custodial accounts in Europe. For example, Belgium’s holdings of Treasurys last month increased $12.6B to an all-time high of $481B – likely driven by China offsetting its official selling.
Belgium’s GDP is a little more than $700B. If the US held the same ratio of Treasurys to GDP, we would need to hold $16T of Treasurys – basically half the market. I guarantee you that Belgium isn’t holding that much in Treasurys for themselves. It’s China. China isn’t dumping Treasurys.
Keep an eye on cap prices. With the market slowly backing out cuts this year, and even some like JPM suggesting the next move is a rate hike, cap prices have ticked up ever so slightly.
The Week Ahead
Obviously, Wednesday’s FOMC meeting is the main event, but that might get Trumped by a Chair announcement…an invasion of Greenland…a showdown between ICE and police…snowmageddon…a government shutdown…a Philly offensive coordinator hire…Steelers hiring a terrible coach… It was just three weeks ago that the US snatched Venezuela’s president from his home and Trump posted a pic of himself as acting president of the country.