Fed's Rate Hike Sets Up "Tough" October Meeting Amid Equity, Yield Volatility

SPEAKER_1 (0:00)

What it means, Jason England, Managing Director, Portfolio Manager at Simplify, is with me. You noted in your notes, the big phrase, how the Fed removed a dose of accommodation with that hike. What did that mean to you when you heard that language from Kevin Warsh yesterday?

Jason England (0:16)

Yeah, thanks for having me today, Nicole. I think it really was outlining the fact that they realized maybe they need to take away some of those insurance cuts that they had at the end of 2025 Remember, they did 75 base points of cuts.

They realized that he highlighted in his speech at the press conference that they no longer see or they don't see anything predominantly showing a restrictive financial condition. Removing a dose of that to, obviously, it's not going to do much 25 base points to tame the energy supply shock that we've seen, but it does give them a little more restrictive policy rate right now.

SPEAKER_1 (0:59)

We did get some good news from our Fed Chair and the committee in the prepared statement, talking about the jobs market being strong and the economy, and it didn't feel particularly worrisome, felt somewhat calm, and we do have the uncertainty of the geopolitical picture here in oil right now at 102, for example. What else did you take away from either the statement or his comments?

Jason England (1:25)

I think the biggest takeaway for me was the surprise of the unanimous vote. We've seen dissents in almost every meeting besides the June meeting this year, and now this meeting as well. So it was surprising that the committee all shifted to more of a hawkish nature, and we saw that in the dog plot too. You know, there's at least 16 members now, see at least one more hiked this year. So it was a little bit surprising that they've shifted that narrative, and I guess it's maybe back to removing these, you know, these insurance cuts of last year, because as you highlighted there, it's a strengthening economy.

He mentioned that many times. We have a very strong and stable labor market, and inflation still remains elevated, and it's been high for too long, and so they need to do something about that. It's been running above their 2% target for over five years now, so they realized the urgency. If they didn't act here, you know, he would probably lose his credibility, as is tough talk at Jackson Hole being hawkish, as well as the fact that the Fed credibility, if they didn't do anything in the face of, you know, really what the market forced them to do with the 90% probability that they were gonna hike yesterday.

SPEAKER_1 (2:38)

And I saw and I was watching the yields and bonds, and what I saw was a big sell off in the two year, you know, came down and went back up. We watched the long end in the 30 year.

These moves don't ultimately control what the bond market does or does not do, or does it? I don't know, you tell me.

Jason England (2:58)

Yeah, obviously the Fed could control the front end, so the two year, that's what the Fed funds rate and that's what they do look to. And you see it's probably, you know, has overshot too high at this point, because right now, even with the hike yesterday, and you have a two year rate somewhere above 470 now, you're looking at 100 basis points above what the Fed funds medium rate is right now. So it is much higher than probably it should be.

Now we've seen a little bit of retracement this morning, we saw a little bit of rallying rates, and you know, it's really around now, can they control the front? Now the back end of the curve, the longer dated bonds are really more about the geopolitical events going on, the fiscal concerns, as well as the fact we've had heavy issuance by the AI hyperscalers, as well as the global phenomenon, global sovereign yields have been going up across multiple different countries. So that's really pushing the back end, the Fed can't control that as much. But the front end, they do want to try to control with the Fed funds rate, and I think that's why they did have to move closer to the two year by hiking yesterday, but they still have some ground to cover.

SPEAKER_1 (4:09)

Yeah, and what's interesting too is you do have the next meeting in October, the likelihood of that rate hike is under 50 percent right now, I believe, because that is right and butts up against the elections, the midterm elections, and then there's December where you're seeing a much more likely path. I think the first one's at 54 percent and the next one's at 90 percent.