By Serafino Tobia, Director of Agency CMBS Trading and Portfolio
- The 10-year Treasury yield is currently 4.12%, higher by 8 basis points since last Monday, with a range of 15 basis points (3.99% to 4.14%).
- 2-year Treasuries are at 3.57% this morning, 3 basis points higher since last Monday.
Just ahead of the FOMC’s rate cut decision on Wednesday afternoon, the 10-year Treasury yield dipped to 3.99%. However, yields reversed course later Wednesday afternoon, rising by 6–7 basis points after Fed Chairman Powell emphasized that inflation remains a concern and reiterated the Fed’s data-dependent approach to future rate cuts. Rates climbed through Friday as investors reassessed the economic outlook and recalibrated expectations for the pace and extent of future Fed rate cuts. There was also profit-taking, driven by recent price gains and a classic “buy the rumor, sell the news” dynamic.
Last Week’s Economic Data
Last week’s data was mixed with the economy showing signs of moderation rather than contraction. On the one hand, consumer spending remains solid and GDP growth expectations have improved. On the other hand, housing activity is cooling, and regional business surveys point to weakening sentiment.
Hard Data
- Retail Sales – August Retail Sales printed at +0.6%. Economists were forecasting +0.2%. July was revised higher by 0.1% to +0.6%.
- Import Prices printed at +0.3% for August (versus July at 0.2% as revised)
- Export Prices printed at +0.3% for August (versus July at 0.3% as revised)
- Housing Starts printed at -8.5% for August (versus July at 3.4% as revised)
- Building Permit printed at -3.7% for August (versus July at -2.2%)
- Weekly Initial Jobless Claims printed 231,000, reversing last week’s spike at 264k. With the benefit of hindsight, last week’s high print was an anomaly because it was driven almost entirely by a doubling in filings in Texas. The 4-week moving average is 240,000 and considered ordinary.
Soft Data (Surveys)
- Empire Manufacturing Survey - September Manufacturing activity declined modestly in New York State -8.7 (vs. expected at 5 and last month at 11.9). This is the largest monthly decline in 6 months.
- New York Fed Services Business Activity Survey - The NY Fed’s services survey for September printed -19.4 versus expected at -5.8 and last month’s print of -11.7.
- Atlanta Fed GDPNow: Atlanta Fed raises Q3 GDP forecast from 3.1% to 3.4%.
Fed Monetary Policy: Fed Cuts Rates by 25bps, Signals Cautious Path Ahead
Fed Chairman Powell’s Press Conference on 9/17/2025
Last Wednesday, the Federal Reserve cut the Fed Funds rate by 25 basis points, bringing Fed Funds to 4.08% (target range 4.00%-4.25%). The decision was nearly unanimous, with only Stephen Miran—President Trump’s recent Fed appointee—dissenting in favor of a deeper 50 bps cut. Fed Chair Jerome Powell described the move as a “risk management rate cut,” citing rising risks to both employment and inflation.
The Fed also released its updated Dot Plot, showing policymakers’ projections for future rate levels. The median forecast for year-end 2025 is 3.6%, implying two more 25bps cuts. However, the wide dispersion of views—9 out of 19 officials projecting just one more cut—suggests a data-dependent, meeting-by-meeting approach. For year-end 2026, the median forecast is 3.35%, indicating just one additional cut during the whole of 2026.
During the press conference, Powell emphasized the Fed’s dual mandate, noting that while unemployment remains relatively low at 4.3%, job growth has been weak since April, with both hiring and layoffs subdued. The Fed expects unemployment to rise modestly to 4.5% by year-end, then gradually decline. On inflation, the Fed projects PCE inflation to ease from 3.0% in 2025 to 2.6% in 2026, and 2.1% in 2027. While higher tariffs may temporarily boost prices, the Fed aims to prevent these from becoming a persistent inflationary force.
The bond market continues to expect aggressive rate cuts by the Fed. As implied by the yield curve, the Fed Funds rate will be lowered by 0.455% by year end (just less than two 0.25% rate cuts. However, the yield curve implies the Fed Funds rate to be 2.945% by the end of next year(YE 2026), somewhat of a disconnect with the Fed’s dot plot forecast. The Fed appears committed to a pragmatic, cautious stance.
My Take on Longer Term Yields
After a nearly two-month rally that saw 10-year Treasury yields fall from an intra-day high of 4.49% in mid-July to just below 4% in mid-September, yields have now edged higher, trading 10-15 bps above 4%. Investors appear to be reassessing the balance between persistent inflation and a cooling labor market —but still solid economy.
Over the past couple of months, bond market sentiment improved across the curve, driven by a series of weaker-than-expected labor reports.
- The July employment report showed only +73k new jobs, with significant downward revisions to May and June totaling -258k.
- August continued the trend with just +22k new jobs and a rise in the unemployment rate to 4.3%.
- Additionally, the Bureau of Labor Statistics issued a sobering -911k revision to job growth for the year ending March 31, 2025.
However, the overall economy, while cooling, doesn’t seem to be headed towards a recession. Job creation has slowed, but this has been offset by a shrinking labor force and relatively stable layoff activity. The spike in weekly jobless claims 11 days ago appears to have been an anomaly, with weekly claims retreating last week. Meanwhile, fiscal expansion through the “One Big Beautiful Act” and evolving tariff policies add fuel to a higher inflation outlook.
This Week’s Economic Data
The key data releases this week include the PCE Inflation index on Thursday, UMich Consumer Sentiment on Friday as well as other data on home sales and production and regional surveys.
The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.