Why the Fed could deliver one final sting to your portfolio before Powell's exit in May - MarketWatch## Mark Hulbert# Why the Fed could deliver one final sting to your portfolio before Powell's exit in May## Interest rates typically go up when a Fed chair steps downPublished: Feb. 19, 2026 at 7:46 a.m. ETShareResize- --Listen(4 min)Federal Reserve Chair Jerome Powell is in his final three months at the head of the U.S. central bank. Photo: AFP/Getty ImagesIt's possible that U.S. interest rates will be highe ...

Nouriel Roubini of Roubini Macro Associates joins us now for more now. Good morning. Good to see you.Great seeing you. Walked into the studio and said no longer Dr. . Gloom, Dr.. Boom. Is that right. What's behind the new doctor.Boom. Well, I've been arguing for over a year that there's a productivity growth acceleration because of technologies of the future. Everybody's obsess about junior high, but there's also semiconductors, robotic automation, quantum fusion.The fans like fintech in material science, s ...

Core Insights - Kevin Worsh is viewed as a strong candidate for the Fed chair position, bringing fresh ideas and independence to the role, which may not align closely with the Trump administration [2][4][5] - The market is reacting negatively to the potential for slower interest rate cuts under Worsh's leadership, contributing to a selloff in stocks and declines in gold and silver prices [7][9][11] Market Reactions - The 10-year bond yield is at 4.26%, indicating market adjustments in response to Worsh's nomination [7] - Gold prices have dropped by 5% and silver by 13.7%, reflecting significant volatility in the metals market [8][11] - Overall market sentiment is down, with major stocks like Apple and Visa showing small declines pre-market [10] Economic Indicators - The Producer Price Index (PPI) shows a headline increase of 0.5% month-over-month and 3% year-over-year, with final demand services up by 0.7% [13][14] - A notable 1.7% increase in margins for final demand trade services has skewed the PPI numbers [14] - Upcoming labor market data, including jobless claims and non-farm payroll, is expected to be closely monitored [15][16]

Core Insights - The bond market has stabilized, with 10-year yields hovering between 4.1% and 4.2%, contributing to support in the equity market [2] - Economic data, particularly GDP, will be a focal point for market participants, with expectations of consumer strength influencing future economic outlook [3][4] - Long-term yields are expected to remain rangebound until 2026, with potential for shifts based on economic data [4][5] Fixed Income Market - The lack of volatility in the bond market has been beneficial for equities, and expectations suggest that yields will remain elevated and rangebound [8][10] - The market anticipates one to two rate cuts by the Federal Reserve into 2026, but inflation is expected to remain relatively stable [11][12] - The term premium has increased due to uncertainties in fiscal policy and Federal Reserve actions, indicating potential for higher long-term yields [13][14] International Equity Market - International stocks are projected to see earnings growth of 11.5% next year, up from flat earnings this year in the Eurozone, with attractive valuations compared to the S&P 500 [7] - The broadening of the equity market rally may benefit international stocks, particularly as investors seek growth beyond technology sectors [6] - Japan is showing stronger performance compared to the EU, with increased defense spending and positive economic indicators [15][16] European Market Outlook - Germany's fiscal stimulus program is expected to ramp up next year, which could enhance growth and earnings in the Eurozone [16][17] - Recent optimism from the European Central Bank regarding GDP forecasts is supported by government spending, exports, and corporate investments, including in AI [17][18] - Increased lending in the Eurozone is anticipated to boost growth and earnings, contributing positively to the market outlook [18]

Fed Policy Stance - The market interprets the Fed's recent actions as a dovish meeting rather than a hawkish cut, despite the rate cut [1][2][7][10] - The Fed is perceived to be more focused on employment risks, specifically the potential rise in unemployment, than on inflationary pressures [6] - The Fed seems to downplay inflationary risks, suggesting good progress on inflation, if not for tariffs [3][4][5] Quantitative Easing (QE) and Tightening (QT) - The Fed has unexpectedly ramped up QE by $40 billion, after a period of QT, raising hopes for further QE if needed [7] Interest Rate Dynamics - Despite the Fed dropping rates by 175 basis points since September, the 2-year Treasury rate remains unchanged [6] - The Fed funds rate is now in line with the 2-year Treasury yield [5][6] - Long-term interest rates, such as the 30-year Treasury, have risen by approximately 75 basis points since the Fed started cutting rates [8][9] - The 2s30s Treasury curve has steepened to around 123-124 basis points, approaching the year's high of 130 basis points [10] Economic Assessment - The Fed estimates that monthly jobs gains are overstated by approximately 60,000, suggesting a potentially weaker labor market than reported [2] - The market believes that cutting interest rates is not helpful for long-term interest rates [9] - Cutting rates by 175 basis points has not helped the housing market [8]

Group 1 - The Federal Reserve is expected to implement a "hawkish cut" of 25 basis points, with potential dissent among members regarding the decision [1][2] - There may be two to three members advocating for keeping interest rates unchanged, indicating significant dissent within the Fed [2] - The upcoming announcement of a new Fed official could influence market dynamics, particularly if it is Kevin Hasset [5] Group 2 - The bond market is anticipated to remain relatively stable despite a potential decrease in interest rates, as historical trends suggest the Fed funds rate typically sits about 100 basis points below the 10-year rate [6][7] - A significant amount of loans, over $15 trillion, are tied to the Fed funds rate, which will stimulate the economy through short-term borrowing despite limited impact on long-term rates [8] - Current economic indicators suggest that the economy is performing well, with no significant downturn in sales, which may alleviate concerns regarding the impact of tariffs [11]

Give us your response, your thoughts on Kevin Hassett as the next potential Fed chair. Yeah. Well, I mean, I think he's he's seen by markets as as the candidate that is closest to the administration in terms of their their views on interest rates.And that is, you know is clearly more dovish than the the central you know, the consensus on the committee right now. You know, just in terms of the outlook for him, you know, it's no guarantee that Powell will step down from the board when his chairmanship chairma ...

Monetary Policy Considerations - The Federal Reserve's upcoming decision is viewed as an agonizing one, with market probabilities at 50/50 [1][2] - The Fed funds rate is currently in a range of 3.75% to 4% [5][6] - Some believe the neutral Fed funds rate is much lower, potentially leading to a 50 basis point cut [6] - The real neutral Fed funds rate (adjusted for inflation) is estimated to be between 0.75% and 1% [7] - A neutral nominal Fed funds rate of 2.75% assumes inflation will return to 2%, but it's currently running at 2.75% to 3% [8] - Adding the current inflation rate (2.75% to 3%) to the real neutral rate (0.75% to 1%) yields a nominal rate of 3.5% to 3.75% [9] - The market is seeing more hawkish voices emerge because the Fed is closer to neutral, having already cut rates by 25 basis points in October [11] - The Fed needs to assess whether the labor market weakness is cyclical, due to the shutdown, or structural (mismatches between jobs and job seekers) [13] Economic Factors Influencing the Fed - Near-term tariffs are slowing growth [3] - Immigration policies and uncertainty around 12 to 15 million immigrants in the workforce are affecting supply and hurting growth [4] - The government shutdown has hurt growth, but its resolution will help [4][12] - Tailwinds in 2026 include the unwinding of the shutdown, tax incentives, and regulatory relief [4] - The AI data center power boom is considered near neutral on the Fed funds rate [5] - Inflation has been sticky and running 0.75% to 1% above target [12]

Core Viewpoint - The Federal Reserve's recent decision to cut interest rates by 25 basis points reflects a cautious approach, avoiding dissent among members, and indicates a focus on future economic conditions, particularly in relation to the housing market [1][2][4]. Interest Rates and Monetary Policy - The Federal Reserve's current stance is to maintain a tight monetary policy, with discussions around the neutral rate being between 3% to 3.75% [3][4]. - Predictions suggest that the Fed funds rate could stabilize around 3% in the coming year, which is expected to significantly impact the housing market [5][4]. Housing Market Dynamics - Approximately 85% of mortgage holders currently have rates below 5.5%, which limits their willingness to move unless rates decrease significantly [5]. - The housing market is perceived to be "locked" until mortgage rates become more favorable, with a target rate of around 5.5% seen as necessary to stimulate movement [6][7]. Market Reactions and Future Outlook - The Russell 2000 index, which includes many small-cap stocks, is showing positive movement, indicating market optimism despite current bond yield levels [8]. - The market tends to price in future conditions, typically 6 to 8 months ahead, suggesting that current stock movements reflect anticipated economic changes [9]. Sector Performance - Sectors such as technology and consumer discretionary are expected to perform better with lower interest rates, as they are more sensitive to financing costs [10][11].

Fed Policy & Market Commentary - Scott Besson's claim that the Fed funds rate should be 150 basis points (1.5%) lower is considered inaccurate and potentially misleading [2][4] - The industry expresses concern over suggestions of a "rogue" Fed, emphasizing the importance of calm and reasoned communication [3] - Upcoming Jackson Hole meeting may reveal a potential shift away from average index inflation targeting, a move considered ill-timed in retrospect [5] - Core inflation is above 3% and rising, requiring strong justification for policy adjustments [5] Central Bank Dissent & Rate Expectations - The Bank of England's visible dissent and split votes on interest rates have surprisingly led to smoother rate expectations compared to the US [8] - Open and honest arguments among economists, as seen in the Bank of England, can be beneficial in navigating rate expectations [9] Potential Policy Shifts - The administration might focus on recent Fed mistakes, potentially influencing future policy decisions [5] - There is a discussion on whether the Fed should adopt a more argumentative approach, similar to the Bank of England, to foster transparency and debate [6]