The Fed Cuts – Will the Bond Market Finally Listen?

Federal Reserve Actions - The Federal Reserve cut the fed funds target range by 25 basis points to 3.50%–3.75% in a 9–3 vote, marking the first dissent in six years [1] - Chairman Jerome Powell indicated that this rate cut does not signal the start of a full easing cycle, as the Fed is now in "wait" mode [2] - The updated Dot Plot suggests only one additional quarter-point cut in 2026, with some officials predicting no cuts or even a potential increase next year, highlighting divisions within the committee [3] Economic Outlook - Powell expressed optimism about the economy, projecting growth above trend and a gradual decrease in inflation, with unemployment expected to peak at 4.5% before declining [4] - He noted that inflation could have been in the low-2% range without tariffs, and anticipates a significant easing of inflation in the second half of 2026 [5] Market Reactions - Following the Fed's decision, all three major indexes rose, with the Russell 2000 gaining approximately 1.3%, indicating a positive market response to the rate cut [6] - The 10-year Treasury yield spiked to a three-month high earlier in the week due to comments from Kevin Hassett, a potential Fed Chair replacement, who advocated for data-dependent decision-making rather than a predetermined rate path [7][9] Treasury Yield Dynamics - The 10-year Treasury yield is crucial as it influences borrowing costs across the economy, affects stock valuations, and can lead to a rotation of funds from equities to bonds [10][13] - Powell suggested that the rising yield could reflect expectations of higher economic growth, partly driven by increased productivity from AI [20] AI Economic Impact - A study from OpenAI revealed that AI tools are saving workers 40 to 60 minutes daily, potentially translating to $1.6 trillion in economic cost savings, which is about 6% of U.S. GDP [22][24] - If productivity gains from AI increase to two or three hours saved per day, the economic value could exceed $10 trillion [27] Investment Opportunities - The Power Portfolio, created by investment experts, aims to identify companies that will benefit from the ongoing economic realignment driven by AI and other technological advancements [28][31] - The focus is on smaller, overlooked U.S. companies that are positioned to capitalize on the significant capital flows into AI infrastructure and advanced manufacturing [30][31]