Macro Matters: Post-Fed Thoughts From BI Rates Strategist Jersey

Welcome to FICFocus, where Bloomberg intelligence fixed income, credit currency, and commodity strategists, and guests discuss current and future market influences. Now, here's the Bloomberg intelligence FIC research team. Welcome to this macro matters edition of the FICFocus podcast series. I'm Ira Jersey, the chief interest rate strategist for Bloomberg intelligence, the research arm of Bloomberg LP. Today is the 17th day of September, 2026, the day after the Federal Reserve raised interest rates by 25 basis points, and signaling that they would do at least one more based on the dot plot, but the market seems to think that they might do another 75 basis points instead. I'm going to be solo today, just wanted to give some of our views on this very short version of the podcast about what we see for the yield curve and how the Federal Reserve might react in the future. So firstly, let me say that I think Kevin Morse in his post meeting press conference finally got it right. Now, I know that there was a significant change in the way that they hosted the press conference. It was only 30 minutes, instead of 45, different voices, different people asking questions, and also no follow-up. So there wasn't the two questions per reporter in that particular press conference yesterday. So things moved pretty quickly, but importantly, and I think based on both his prepared remarks as well as in the Q&A session, Mr. Worsh was significantly more clear with the markets as to their intentions, right? He said inflation is too high and has been too high for too long. And because of the underlying strength of the economy, we can afford to focus on price stability. So this is something that we had thought in our preview that basically the central bank and the Fed, which is one of the few obviously that has a dual mandate, can focus on one when the other, when the other mandate is reasonably good. So with economic growth good and you saw the non-form payrolls report was decent, well over 100,000 jobs created in the month of August. That gave the Fed reserve the ability to increase interest rates and probably take back the cuts that occurred in 2025. So we do think that they'll probably hike another 50 basis points and then re-evaluate. It may be quarterly interest rate hikes. We don't expect them to go in October, but if they would not surprise us if they went in December and then either January or March next year. So what does this mean for the yield curve? Well, when if you go back in history and you go back the last 30 years, what you see is that the yield curve tends to flatten going into the first rate hike in anticipation of that hike, presumably, which is exactly what you've seen over the last few months. And then for the following six to 12 months after that, you wind up seeing additional flattening and the curve getting either very flat or inverting modestly. So when looking at something like the twos, there's 30s treasury curve, which is something we wrote about this morning in our research note that you can find on the Bloomberg terminal. The last couple of times that the Fed has raised interest rates, you have seen this inversion to varying degrees, I suspect that we'll get to flat. Will we invert? Yeah, maybe 10, 15 basis points, something like that, particularly before the Fed Reserve is going to start as actually cutting interest rates once again. And a flat curve is an interesting situation because it does mean that the front end of the curve will wind up offering opportunities because the chances of losing money by buying a four and three quarter percent to your note versus a four and three quarter percent 30 year is very attractive because you'd have to more than double interest rates, right? Interest rates would have to go to 9% over a one year period in order for the two year note to start losing money and for your principal to start degrading. So you wind up having things like effectively money market alternatives and the like. And you also have some protection in the event that the Fed Reserve were to turn around and cut interest rates because of a crisis or a big deterioration in the economy more quickly than most people, including ourselves, anticipate at the moment. So you know, two year to five year notes will probably, what will probably do reasonably well, certainly from a short ratio perspective, they would do so. You know, that being said, the our natural language processing model does show that that worse was once again pretty hawkish in his opening remarks, very consistent with the last two meetings. He's been very consistent and consistently, consistently targeting inflation. And that is going to continue to be the key. Now, inflation should start to come down on a core basis, which is one of the reasons why you've heard Mr. Worsh keep on talking about the underlying inflation trend. So he wants to does want to look through energy and some of the supply shocks going on there, but they can't be completely ignored either because they go into things like inflation expectations. And one of the reasons why I think that Fed, you know, had to hike and we'll have to probably hike a few more times is to maintain their credibility and ensure that inflation expectations don't get unanchored. And that is a big fear of a lot of members of the Federal Reserve. So Mr. Worsh himself noted, noted something else and one he was asked about why 30 year and the long end of the yield curve was where it is, and he seemed to have a pretty decent grasp on that. I mean, I refer to a note that we wrote about a month ago, looking at the different factors that were going into why 30 year rates and 10 year rates are close to just above 5%. And the main reason is that growth is good, right? And you know, I know President Trump tweeted that he thought that interest rates should be at 1% or below because the economy is so good, well, he's not a bond investor clearly. He's on the other side of that, right? He's a borrower. And but as a bond investor, you demand basically nominal GDP for where you want to be able to buy your 10 year note and we're still under that, right, with growth, nominal growth at 6% or a little bit above 6%, having 5% or 10 year yields is not a huge surprise. And I think it's reasonable. So our fair value model currently shows somewhere around 481 being fair value on the 10 year note, so we are above that at 495 as we record in the morning after the fed raised rates. So there is potentially scope for a little bit of a rally, but I suspect that the market is still going to be on edge at least a little bit. And the big thing as I noted is we do expect there to be some yield curve flattening over the course of the next few months. And if nothing else, you wind up with interesting carry profiles, particularly again for that front end of the yield curve. We'll be back with more guests next week for those of you who are celebrating the Young Kapoor holiday on Monday, Lesha Nantuvah and EasyFast. For those of you who aren't, we will have our normal course of our morning call at 8.30 AM, Eastern time if you're available and you can find that on Biko Go, the column numbers for that particular call. I'm Ira Jersey. We appreciate you listening. Please subscribe, rate, and review us on your preferred podcast platform and contact us on the Bloomberg terminal. Let us know what you thought about this conversation and any other topics you'd like us to cover or guests you'd like to hear from. Thanks again for listening and until next time, be well. [MUSIC]