Markets were quietly nervous yesterday as many are uncertain over the pace of easing in 2026. Wariness is also growing about the sustainability of a further AI driven rally.
Kevin Hassert, a top candidate to take over the role of Fed chair, said it would be irresponsible for the Federal Reserve to lay out a plan for where it aims to take interest rates over the next six months, emphasizing the importance of following the economic data.
As widely discussed, the President is dogmatic that that FOMC lowers the overnight rate to 2%. Most would agree that such a policy would further ignite inflation.
Long-dated debt is beginning to reflect the possibility of lower short-term rates as last week the bond market had its worst week in eight months. The last time the yield curve was this steep was early 2022.
Wednesday’s FOMC decision is unlikely to be unanimous, with dissent expected from both hawks and doves.
FRB Chair has stated it is focusing on unemployment. The job market is not losing jobs, but it is also not gaining jobs. Employers are nervous to hire or fire workers, stuck in limbo or as one person commented “The Twilight Zone.”
The labor market weakness, whether due to a downshift in the “natural breakeven job growth” from restrictive immigration policies and AI or because the economy is actually slowing could cause the Fed Chief to sound more dovish.
A major question at hand will the focus of 2026 monetary policy become government spending concerns? Some influential market participants including JP Morgan’s Jamie Dimon, Bridgewater’s Ray Dalio and former PIMCO bond king Bill Gross believe reckless fiscal policy will become the dominant theme in 2026.
Radically changing topics and perhaps of great significance, the Supreme Cout signaled it is poised to the give the President control over potentially dozens of traditionally independent federal agencies by permitting the President to fire key officials.
Many on both sides of the political aisle have commented that the Federal Bureaucracy has become too powerful, creating and enforcing regulations without impunity. Perhaps of even more significance, however, a carve out for independence…aka no control from the Executive Branch–of the Central Bank is expected.
How will this unfold?
Last night the foreign markets were mixed. London was up 0.04%, Paris down 0.62%, and Frankfurt up 0.30%. China was down 0.37%, Japan up 0.14% and Hang Seng down 1.29%.
Futures are little changed. The 10-year is up 1/32 to yield 4.16%.
