US Rates: Talk the talk, walk the walk

(upbeat music) - You're listening to at any rate, J.P. Morgan's Global Research Podcast, where we take a look at the story behind some of the biggest trends in themes and fixed income currency and commodity markets today. I'm your host, J. Barry, head of Global Rate Strategy at J.P. Morgan, and today I'm joined by my colleague, Amanda Burke, U.S. Rate Strategist. Hi, Amanda. - Hey, Jay. - So obviously this is the week that the markets have been waiting for. For some time, there has been a big debate about the September FMC meeting and whether the Fed would raise rates. And those sensitivities increased after the Chair, Jackson Hole speech, after the August Employment Report and then after the August CPI report. So the Fed did deliver, it raised rates by 25 basis points for its first hike since July of 2023. And on the week, the Treasury curve has twist flattened. So through Thursday afternoon, when we're recording this front and yields have risen by about five basis points. And long and yields have declined by a similar magnitude. So Amanda, to bring you into the conversation, what did we learn from the FMC meeting this week? And how do you think it's affecting the rates complex? - Yeah, of course. It was an interesting meeting. We did, as you mentioned, get at 25 basis point hike, which was the first of its kind since the summer of 2023. Now that was baked into the pricing, essentially by the time we got to the meetings. That was less of a surprise. The decision was unanimous. We thought a bit about whether there might be some descends, but ultimately it was all voting members who voted for a hike. The SEP, which we also received this meeting, that skewed somewhat hawkishly. So there are some interesting things in there. The median participant now looks for one more hike this year and expects policy rates to hold steady in 2027. Now on the 2027 dot distribution, it is interesting. It's still leaning dovishly depending on the verses where market pricing currently is, which expects something close to four hikes in this mini hiking cycle, or this min cycle adjustment, I should say. But it is all hawkish skew versus where those dots were sitting in June when we last received them. And we now have eight participants projecting an additional hike next year. So there were some interesting hawkish parts of just the part that we received at two. Now, of course, the chairs remarks at the press conference, there were some additional hawkish spots. It's hard to know exactly where a war sits in the distribution of hawkish outcomes, but we would point to the fact that he continued to argue that this move was removing a dose of accommodation. And he really wanted to drive this point home. He repeated it a couple of times during the Q&A. And he also said that he would be hard pressed to describe broad financial conditions as restrictive. So it does seem that he does not believe that policy is restrictive. And that would indicate that he does actually believe that this rate hike was warranted. When he was asked about the move itself, he also stated that the action shows that that is becoming serious about this, which was a direct quote, which also suggests that not only was this rate hike something he at least believed to be necessary, but also that this might be the start of something more instead of just being a small adjustment to one and done kind of hiking cycle. So on the back of all that, it's somewhat unsurprising that we have a more hawkish path now in for the FOMC. And you saw that reflected in the moves on the curve itself. We now have something that we think that looks something like some other mid-cycle adjustments, which in that case, in the last time we saw something like that was in 1999 to 2000. And in that case, we did get a delivery of about a hundred basis points of hiking. And so someone unsurprisingly, we saw some reflection of that in price action and we saw flattening in the curve. Now, of course, that's the setup for this week, but Jay, what I wanna ask you is, how do you see this backdrop pushing us going forward? - No, thanks, should have demanded. I think you just briefly touched on it that we've been making the case for the last number of months, that the Fed was unlikely to hike just once, and that there is no perfect analog for this environment. But if we look across the spectrum of other Fed cycles, that 1999 to 2000 is a close analog, we can find. Now, there is, of course, some debate internally here. Bruce likes to call this the 6/7 economy because he thinks this looks like something like 1986 into '87 or 1996 into '97, given the resilience of the economy and the strength of growth, but clearly in that latter, when the Fed raised rates only once as the Asian currency crisis kind of derailed that, we all know what happened in 1987. I'm using '99 to 2000 because in that environment, taking out the reversal of the 75 basis points and cuts around the Russia crisis and the LTCM failure, the Fed would go on to raise rates by 100 basis points. So in that respect, we've been saying, as you mentioned, it was reasonable to expect the markets to price somewhere between 50 to 100 basis points of rates hikes. And now we are at aggregate with markets pricing in about threefold further hikes from here at the upper end of that range. But I think with everything that you've talked about, and with what we have learned this week, that the chair does not necessarily think policy is restrictive, that there was unanimous support from the committee, that the dots into 27 are higher with the hot push queue. And importantly, at the balance of risks and the risk distribution around growth are decidedly to the upside. And the most aggressively to the upside that we've seen in the history of the SEP, this makes us think that perhaps instead of our forecast reflecting the lower end to the midpoint of that 50 to 100 basis points, that it should be closer to the upper end of that. So with that in mind, we've made adjustments to our interest rate forecast just today. And formally, we have thought that 10-year yields would end the year at 485. Now we think that they will end the year at 505. So that is an increase of 20 basis points. And to be fair, how are we getting to 10-year yields still higher from where they are right now, even though the markets are fully pricing in an additional three hikes. Some of it is the expectation is that over the balance of this year, that we will get some mean reversion. I think as most of our listeners and you and I have been talking about every day, we've been making the case that the 10-year sector, the curve, hasn't fully caught up to the repricing and fed policy expectations that we've had. And in our framework, have continued to trade 15 to 20 basis points to low. So this incorporates a bit of mean reversion there. So all in, it's a small move versus current levels. But I think the important point in my mind here is that if we are in the early stages of the fed potentially raising rates here, and not looking for a full-blown cycle like 2022 or into 23, we don't necessarily think the move to higher yield is quite done. And we would also say that given this shift versus current levels, it's fair to say that we've had a sizeable increase in rates here over the course of the past month and of course over the past six months. But there's reasons to think that that pace slows from here. Yeah, so a bit more to run on the upside for yields going forward. I guess the natural next question is, that's the most likely outcome. What are the risks that are on that type of forecast? Perfect question. Yeah, because we don't live in a modal world. So I think they're twofold. Let's think about two sides of the equation here, or two sides of the risk distribution on the upside for rates from here. If I think we're underestimating the strength of the economy and the labor market tightens significantly from here, I don't know if we can necessarily say that 100 basis points should be a ceiling. So we've been able to price this 100 basis points in on that. Ultimately, if we do see the unemployment rate begin to move materially lower, and now it's back to say unchanged versus where it was 18 months ago, that could be reason to price in more hikes and would leave us still with some side risks to our forecasts. The second is whether we can just overshoot and we have an overshoot in our valuation framework at all. I don't think we've overshot this year because the Fed remains credible and it's expected path of monetary policy. I don't think we've overshot because the actions that the Treasury Department took through its buyback announcement this time a month ago, I don't think they're actually going to be effective in lowering rates. I think they're putting a cap on things for right now. So I think if something changes on that front, that could reduce, it's currently preventing things from overshooting. But if we do overshoot to the upside versus fair value, that's one thing to consider. I don't think the positioning framework or the positioning environment is indicative of that right now or Treasury client survey had been long and it moved closer to home right now. It is a little bit long, so maybe indicative of a bit further position liquidation, but nothing massive here that would make we think we can overshoot. Now on the other side of the equation, what is the risk to the downside? Well, if it's we're just wrong here about the economy, I think the economics team feels pretty comfortable that with having been able, with the consumer having been able to smooth through these successive shocks, that's a good sign that corporate balance sheets are pretty healthy and that with the PMIs and the US and globally suggesting hiring intentions are picking up, that should be a good forward looking signal for growth, but what is for wrong? Then clearly that said, would not have to hike as much as being priced and that would result in lower rates versus our baseline. And then finally, it's financial conditions. I think that's really important here. If FCI tightens materials from here are ranked forecast, maybe too high. And on that note, I would just sort of highlight for you and highlight our listeners that are colleagues in the other side of global market strategy. and Gibraphco's team who runs off global market strategy, published a note over the weekend that looked at a longer-term study of the relationship between treasury yields and S&P multiples. And what they found is that they're sort of an inverted U relationship. And that inverted U, the sensitivities become a bit more negative when 10-year yields substantially rise at the 5%. So that's over a multi-decky period. And that's where we are right now. And if that's the I really tightens, then we're wrong on these forecasts as well. But I think that was a great question, Amanda. And let me just pivot it back to you and take it back to the very near term. So now that we've gotten through the key data from August and the S&M seed meeting, what's on the docket and what should we be on the watch for? - Yeah, talking about risk is a good question. There's actually, I'm not a dearth to turn on data next week. There are the BMI's that will happen next week and we'll get some more information there. But beyond that, the bigger focus is really going to be on the supply side. So we've got two's, five's and seven-year auctions next week. And very much in focus given Treasuries, Recent Actions, we will also have a 20 to 30-year liquidity support buyback next Thursday. I would like to also put a pin for our dear listeners in the Wednesday announcement that will actually give you the eligible QSIP list for that buyback. That will also, if they follow pattern from the last buyback operation, I will also give us some indication on what size that might be. So those are our upcoming, that's the playing field next week. Not a lot of data, but a lot more focused on Treasuries side of the equation. - No, that's a great preview of the band. And I think perhaps tactically with everything we've said here, that maybe this is one more reason that over the near term, what has been a pretty substantial and sizable, although orderly move to higher rates might take a pause here over the near term. So thank you for that. So let's leave it here. Thanks for listening today and stay tuned for more episodes of that any rate. J.P. Morgan's Global Research Podcast Series. This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. Copyright, 2026, J.P. Morgan Chase & Co. All rights reserved. This episode was recorded on September 17th, 2026.