Fed's Labor Market Concerns Drive Dovish Policy, Yield Curve Steepening

Key Quotes

"Well, they cut rates. It's the third consecutive 25 basis point, um, basis point, uh, rate cut. I think the main thing we learned yesterday was Chair Powell is has significant concerns about the, the labor market. Going into the meeting, um, you know, there was a lot of talk about a, a divided committee and how that would manifest in the dots and in the statement, but I think ultimately what we really learned was that the chair has significant concerns about the labor market and maybe, um, the bar to cut further in January, um, you know, isn't as high as previously thought."

Josh Schiffrin explains that the Federal Reserve's recent rate cut, the third consecutive one, signaled deeper concerns about the labor market. Schiffrin highlights that this emphasis from Chair Powell suggests the threshold for future rate cuts in January might be lower than anticipated.

"I, I, I thought, you know, certainly relative to expectations, it, it was really on the, on the dovish, dovish side of things. They changed the statement, um, bringing back the December 24 language, um, you know, that I think indicates, um, um, you know, that their general bias is to, to watch and wait. But throughout the press conference, I thought, um, you know, Chair Powell's emphasis on the, on the labor market was was significant, um, and the, and the bar to cut further, um, you know, maybe isn't as high as, as, as what, um, you know, consensus was going into the, going into the meeting."

Josh Schiffrin characterizes the Federal Reserve's recent actions as dovish, particularly in comparison to market expectations. Schiffrin notes that the modification of the official statement, including the reintroduction of specific language, indicates a cautious approach. He reiterates that Chair Powell's focus on the labor market during the press conference was a key takeaway, potentially lowering the hurdle for future rate reductions.

"I think the yield curve's going to steepen. I think in particular between the two and and 10-year point. I think we have, um, you know, a Fed that's that that's cutting, even as, you know, the broad economy feels like is is doing fine and growth may even accelerate next year. Um, I expect low, low, lower short rates and a steeper yield curve. I think two's tens yield curve in Treasuries, which right now is about 60 basis points. It's going to get to a, you know, a 100 basis points in 2026 or even north of there. So I think the yield curve is going to steepen. Uh, I think the dollar is is going to, you know, resume its weakening as we move into into the end of the year and into 2026 and resume a trend that it had for most of 2025, but kind of stalled out. So, um, the two things that I'm very focused on is a steeper yield curve, uh, and a weaker dollar."

Josh Schiffrin forecasts a steepening yield curve, specifically between the two and ten-year Treasury points. Schiffrin attributes this expectation to the Federal Reserve's rate cuts occurring while the economy appears robust and poised for growth. He also anticipates a weakening dollar, resuming a trend from earlier in the year.

"I think the overall bullish trend is is is still there. Um, you know, I guess I'm cautiously bullish into year end at this point, with, um, you know, a supportive Fed, um, and economy, um, you know, that seems to be, um, doing fine and will accelerate into into 2026. So, um, you know, in the near term, um, you know, I'd look for, um, you know, continuation of the, of the upward trend into the end of the year."

Josh Schiffrin expresses a cautiously bullish outlook for equities heading into the end of the year. Schiffrin bases this view on a supportive Federal Reserve and an economy that is performing well and is expected to accelerate in 2026. He anticipates a continuation of the upward trend in stock prices in the near term.

"Um, well, you know, I expect lower, lower, lower short rates. If you were to get, you know, you know, some, some rise in long rates and that's connected to, to growth expectations firming up, I wouldn't think, um, I wouldn't think that that would be a, you know, an impediment to, to, to, to the risky asset story. I think it should there be, uh, uh, uh, a risky asset wobble, I would, I would connect that maybe more to, um, you know, concerns around, you know, the AI thematic. Um, I expect monetary policy, um, you know, to generally be a, a supportive part of the, of the risky asset story in 2026."

Josh Schiffrin clarifies that while he expects short-term rates to decrease, any rise in long-term rates linked to strengthening growth expectations would not necessarily hinder risk assets. Schiffrin suggests that potential wobbles in risk assets might be more attributable to concerns surrounding specific themes like AI. He maintains that monetary policy is expected to be generally supportive of risk assets in 2026.