Here's My Outlook for the Next Federal Reserve Meetings

For the first time in recent memory, I think rates are, more or less, priced correctly.

At its simplest:

Is the worst behind us on jobs? If I’m correct on my issues with seasonal adjustments (we overstate winter jobs and understate summer jobs), we should get OK reports in the coming months (there will some noise due to hurricanes, but markets will figure out that noise).

And is the best behind us on inflation? I was worried about the potential for inflation to start ticking up before the hurricanes. I think that, as the insurance checks start coming in, we will see a bump in inflation.

The neutral rate has become a part of virtually every bit of "Fed Speak" that we get. Almost all speakers agree that it is higher than they previously thought. So far, they seem to be channeling 3% to 3.5%, but I expect that to solidify to 3.5% to 3.75% sooner than later. We spent more than a year over 5% and the economy has barely slowed!

On the Fed cut front:

• The market is pricing in 2.5 cuts in the next three meetings
• That isn’t far from our expectations. As discussed on Bloomberg TV last week, we are still pricing in 25 BPS in November as a certainty. Bloomberg TV captioned our recent interview as "Embarrassing for the Fed Not to Cut in November." The caption is a bit aggressive (it was 5:30 a.m., after all, and we covered a lot more ground) but I do think, for the sake of continuity and to support the decision to go with a 50 BPS cut in September, they will cut 25 BPS unless we get some extremely strong data. Then I think we can expect a pause for one or both of the next two meetings. Our base case is only two cuts in the next three meetings, which means the market is “only” 0.5 cuts higher than us (the markets were two full cuts more than us a couple weeks ago).

Our current outlook for the next three meetings:

• 50% chance of 25, 0, 25
• 30% chance of 25, 25, 0
• 20% chance of 25, 0, 0

The market doesn’t get below 3.3% on Fed funds until January 2026. That is a far cry from when it was below 3% by the summer of 2025 a few weeks ago. I think that continue to inch up towards 3.6%, but my timing for that is in early 2026. We are basically down to arguing over just about one cut, instead of three, which is where we were.

Again, this is all kind of making sense.

That still leaves me slightly bearish in the 10s, primarily because I think twos versus 10s should be 25 BPS (though they closed at 13, which fits that “kinda right” vibe to today’s report). Also, I just see many more scenarios where we get another “buyers strike,” as the realization that no one in D.C. is incentivized to control the growth of the deficit than I see scenarios that see a surge in demand. For a range on 10s, I think 4% to 4.2%, but with more risk of a breakout to 4.5% than a breakdown to 3.75%. The 30-year is even more susceptible to a major move to higher yields from Friday’s 4.4% close (5% seems unlikely, but is a risk).

I have to highlight that the Atlanta GDPNow estimate is at 3.43%! That is up from a recent low of 2.54% on October 1. This number is a bit volatile, but yet another thing that will slow the Fed down.

Earnings and Market Responses

Taiwan Semiconductor TSM announced earnings that helped that stock jump 10% on Thursday. The chip stocks did well, but not as well as TSM, and the Nasdaq 100 edged only marginally higher. 

To me, the response seemed kinda right. The epicenter of the move was on the stock that delivered the positive outlook, and the strength rippled out from there, but in what seemed appropriately proportional amounts. It didn’t cause the entire market to go into a furor of buying. Similarly, NFLX did extremely well on Friday (up 11%), but it seemed to be treated, correctly in my opinion, as a validation of their business, more than some sign that all tech should rally! 

Yes, markets did rally on Friday, in part because of NFLX, but I think it had more to do with another effort by China to further talk up their markets and their commitment to stimulus. ARKK, which I still use as a barometer for “disruption,” was actually down on Thursday, again signaling “differentiation” rather than excessive speculation in the market.

Breadth seems to be increasing as the Russell 2000 outperformed the other major indices and the equal-weighted S&P 500 beat out the regular S&P 500 on the week (barely, but still, a positive sign for breadth).

The fact that major companies with large market caps can move 10% on earnings still seems a bit bizarre to me, but I like how the rest of the market performed around these earnings — as though we’ve built up a base and are being thoughtful, rather than just slapping the “buy” button.

I’m sticking to my assessment that the Chinese Communist Party (CCP) needs the economy to turn around and will continue to add measures to prop it up. So far, they seem to be following our playbook as though they read the T-report. One thing I do think the market is getting wrong, though, is assuming the Chinese stimulus will help the big global companies, when I believe it will be as targeted as possible to support domestic brands.

I’m still concerned about valuations in some areas and think there is a big risk if we see any signs that spending on AI is slowing or even being questioned. It is just as easy (or maybe easier) to have 10% down days. In general, I do think the market behaved rationally relative to the news flow recently.

Finally, from a purely “market structure” standpoint, we continue to have the risk that a lack of liquidity can cause larger than rational moves in either direction, where the chance of very large single day moves to the downside, heavily outweigh the odds of a big day to the upside.

We are seeing very tight credit spreads, I see no reason for that to change!

Bottom Line

I am mildly bearish on bond yields, but am comfortable with credit spreads. I'm going to start looking to add back exposure on closed-end municipal funds.

I'm overweight Chinese stocks; adding (slowly) to small-cap, value, energy and possibly CRE. I prefer equal-weight indices to regular indices. I still cannot get there on the mega caps and think we are one slightly missed earnings report from a very ugly day in markets — which is why I’m not fulling committed to equities yet.

At the time of publication, Tchir had no positions in any securities mentioned.