US Rates: Talk the talk, walk the walk

Jay Barry (0:03)

You're listening to At Any Rate, JPMorgan's global research podcast, where we take a look at the story behind some of the biggest trends and themes in fixed income currency and commodity markets today. I'm your host, Jay Barry, head of global rate strategy at JPMorgan, and today I'm joined by my colleague, Amanda Berke, US rate strategist. Hi, Amanda.

Amanda Berke (0:23)

Hi, Jay.

Jay Barry (0:25)

Obviously, this is the week that the markets have been waiting for. For some time, there has been a big debate about the September FOMC meeting and whether the Fed would raise rates. Those sensitivities increased after the chair Jackson Hole speech, after the August employment report, and then after the August CPI report. The Fed did deliver. It raised rates by 25 basis points for its first hike since July of 2023

On the week, the Treasury curve has twist flattened. Through Thursday afternoon, when we're recording this, front-end yields have risen by about five basis points, and long-end yields have declined by a similar magnitude. Amanda, to bring you into the conversation, what did we learn from the FOMC meeting this week, and how do you think it's affecting the rates complex?

Amanda Berke (1:10)

Yeah, of course. It was an interesting meeting. We did, as you mentioned, get at 25 basis point hike, which was the first of its kind since the summer of 2023 Now, that was baked into the pricing, essentially, by the time we got to the meeting. So that was less of a surprise. The decision was unanimous. We thought a bit about whether there might be some descents, but ultimately it was all voting members who voted for a hike. The SEP, which we also received at this meeting, that skewed somewhat hawkishly. So there were some interesting things in there. The median participant now looks for one more hike this year and expects policy rates to hold steady in 2027 Now, on the 2027 dot distribution, it is interesting. It's still leaning dovishly depending on the versus where market pricing currently is, which expects something close to four hikes in this mini hiking cycle, or this cycle adjustment, I should say.

But it is a hawkish skew versus where those dots were sitting in June when we last received them. We now have eight participants projecting an additional hike next year. So there were some interesting hawkish parts of just the part that we received at two. Now, of course, the chair's remarks at the press conference, there were some additional hawkish spots. It's hard to know exactly where war sits in the distribution of hawkish outcomes, but we would point to the fact that he continued to argue that this move was removing a dose of accommodation, and he really wanted to drive this point home. He repeated it a couple of times during the Q&A.

He also said that he would be hard-pressed to describe broad financial conditions as restrictive. It does seem that he does not believe that policy is restrictive, and that would indicate that he does actually believe that this rate hike was warranted. When he was asked about the move itself, he also stated that the action shows that the Fed is becoming serious about this, which was a direct quote, which also suggests that not only was this rate hike something that he at least believed to be necessary, but also that this might be the start of something more instead of just being a small adjustment, a one and done hiking cycle.

On the back of all that, it's somewhat unsurprising that we have a more hawkish path now in for the FOMC, and you saw that reflected in the moves on the curve itself. We now have something that we think that looks something like some other mid-cycle adjustments which in that case, in the last time we saw something like that was in 1999 to 2000, and in that case, we did get a delivery of about 100 basis points of hiking. So somewhat unsurprisingly, we saw some reflection of that in price action and we saw flattening in the curve. Now, of course, that's the setup for this week, but Jay, what I want to ask you is, how do you see this backdrop pushing us going forward?

Jay Barry (4:08)

No, thanks for that, Amanda. And I think you just briefly touched on it, that we've been making the case for the last number of months, that the Fed was unlikely to hike just once, and that there is no perfect analog for this environment. But if we look across the spectrum of other Fed cycles that 1999 to 2000 is the closest analog we can find. Now, there is, of course, some debate internally here. Bruce likes to call this the 6-7 economy because he thinks this looks like something like 1986 into 87 or 1996 into 97, given the resilience of the economy and the strength of growth. But clearly in that latter one, the Fed raised rates only once as the Asian currency crisis kind of derailed that. We all know what happened in 1987