Economic Uncertainty & Policy - Uncertainty over policy, including potential tax hikes and global trading policy rearrangements, contributed to a weaker labor market in the first half of the year [1][2][3] - China's reneging on earlier trade deals introduces a new tail risk, potentially increasing downside risks to growth [3][4] - The balance of risks has shifted, necessitating policymakers to consider the implications for policy [5][6] Monetary Policy & Neutral Rate - Urgency to move to a more neutral policy stance quickly, as current policy is considered restrictive and vulnerable to shocks [7][8] - The speaker's view on the pace of reaching a neutral rate is somewhat out of consensus, advocating for a quicker move due to less concern about upside inflation [9][10] - Neutral policy rate is the rate at which monetary policy is neither restrictive nor accommodative, but it's difficult to observe directly and models provide wide confidence bands [11][12] - Significant shocks to the economy in recent years, such as changes in immigration policy, have likely caused substantial shifts in the neutral rate [13][14][15] Economic Indicators & Market Reaction - The economy was weaker in the first half of the year, potentially related to trade and uncertainty around trade and taxes [17][18] - The housing market is moribund due to high mortgage rates, representing a significant transmission channel for monetary policy [19] - Bond market reaction to rate cuts differs this year compared to last year, with long yields slightly down by 4-5 basis points in the 18 trading sessions since the cut, contrasting with a 30 basis points increase in the same period last year [22]

Core Viewpoint - The Federal Reserve is expected to move towards further rate cuts, potentially reducing the policy rate to a neutral zone of 3% to 3.5% in the coming meetings, despite some hawkish sentiments among committee members [3][4][8]. Group 1: Federal Reserve's Rate Policy - The absence of new data due to a potential government shutdown may lead the Fed to rely less on data dependence, allowing for a clearer path towards rate cuts [2][3]. - The Fed is anticipated to implement 25 basis point cuts in the next three to four meetings, aligning the policy rate with the current yield curve [3][4]. - There is a consensus within the Fed committee on the need to move towards a neutral policy rate, although there is disagreement regarding the terminal rate [7][8]. Group 2: Internal Dynamics of the Fed - The Federal Open Market Committee (FOMC) is cautious about committing to specific rate cuts, emphasizing that their projections are not promises [6][8]. - There is a notable division among committee members regarding the terminal rate, with some preferring it to remain above 3% [7]. - Chair Powell is expected to effectively guide the committee towards a steady approach of gradual rate cuts without making definitive promises [8].

Group 1 - The market is pricing in approximately 30 basis points of easing for the upcoming Federal Open Market Committee decision on September 17, with a split between a base case of a quarter-point cut and a smaller chance of a 50 basis point cut [1] - As of September 10, the CME Group's FedWatch tool indicates a 90% probability for a 25 basis point cut, about 10% for a 50 basis point cut, and close to zero for no change, with an implied cut size of roughly 27 to 29 basis points [2] - Polymarket's prediction contract shows an 81% probability for a 25 basis point cut and a 17% probability for a 50 basis point cut, suggesting a potential easing of about 28.8 basis points [3] Group 2 - Recent labor statistics indicate that the U.S. created approximately 911,000 fewer jobs through March 2025 than previously reported, marking the largest downward adjustment since 2009 [4] - Inflation metrics show core CPI at around 3.1% year-over-year in August and core PCE at 2.9% in July, indicating uneven progress in inflation [4] - The Treasury yield curve reflects an easing path at the front end, while the long end remains influenced by term premium and fiscal dynamics [5] Group 3 - A Reuters strategist poll suggests a steeper yield curve by year-end, with the two-year yield projected at around 3.40% and the ten-year yield near 4.25%, resulting in a two-tens spread of approximately 85 basis points [6] - The nominal neutral policy rate is estimated by Cleveland Fed economists to be around 3.7%, indicating that policy would remain above neutral even after a potential quarter- to half-point cut [6] Group 4 - Upcoming economic indicators, including producer prices, consumer prices, and retail sales, are expected to influence market expectations ahead of the Fed announcement [7] - The Producer Price Index (PPI) reported a decrease of -0.1, which slightly increased CME projections for a 50 basis point cut to 10%, while Polymarket odds decreased to 16% [7][8] Group 5 - The market's default expectation is a 25 basis point cut, targeting a range of 4.00% to 4.25%, with forecasts suggesting two to three additional cuts in 2025 and a gradual easing path into 2026 as growth slows [9]