The Cooling Economy May Reshape Future Fed Action
The main event was the FOMC meeting, during which we observed rates remain unchanged, as expected. Federal Reserve Chairman Powell acknowledged that the recent tightening of financial conditions could potentially substitute for an additional rate hike by the FOMC. Markets have been debating this, and it has been the primary reason why most market participants believe the hiking cycle is over.
However, the main driver of falling yields has been the surprises in the economic data reports. Both the ISM Manufacturing and Durable Goods orders came in weaker than expected, while Jobless claims exceeded expectations.
This morning’s much-anticipated Non-Farm Payrolls report showed 150,000 jobs added in October with a 3.9 percent unemployment rate. This weaker labor market further reinforces the notion that Fed policies are having the desired effect, and economic conditions are weakening. While these events have exerted downward pressure on yields, it is important to remember that we still have numerous geopolitical issues and the looming possibility of a government shutdown.