U.S. Economics – Monetary Policy

Intro

Our view coming into the year was that we would likely see the Federal Reserve cut rates by a total of 50 basis points toward the back end of the year, largely due to our expectations for moderate, but not recessionary growth and elevated inflation data. In recent weeks, expectations for rate cuts have increased to a total of 75 basis points by year end. While the headlines surrounding this development have been positive, the start of rate-cutting cycles have historically coincided with negative economic outcomes. That said, we are mostly focused on two dynamics, A). Does the long end of the Treasury curve come down meaningfully, and B). If the long end does come down, will that be positive or negative for credit growth?

The Signals:

• • Fed Funds Futures
    • The FOMC cut rates by 25 basis points at their September 2025 meeting and left the door open for an additional 50 basis points of rate cuts by year end.
      • With the Atlanta Fed GDPNow at 3.3% for Q3 and CPI at 2.9%, it would be unusual to see the start of a continuous rate cutting cycle, absent a material deterioration in the labor market.
  • U.S. 10-Year Treasury
    • Intraday on September 17^th, the 10-year UST yield matched its April 4th low of 4.0%, when tariff-related recession fears were ignited and the market expected the Fed to have cut by a total of 75 basis points by their September meeting and a total of 100 basis points by their December meeting.
      • If the non-recessionary growth outlook remains, inflation continues to come in above target, and the Fed fails to meet the market’s current expectations for rate cuts, we would not expect the long end of the curve to decline meaningfully through year end.
  • Bank Loan Growth
    • Commercial bank lending has continued to improve year-over-year, against easy comparisons from 2024.
      • If real economic activity is expected to improve, we would expect loan growth to likely continue accelerating.

Key Takeaways:

• While we cannot know with certainty what the Fed will do with its target rate, we will continue to track bank loan growth as one signal of where real economic activity is at and likely headed.

Visuals:

Source: Bloomberg

Source: Koyfin

Source: Macrobond

Market Trends:

Source: Macrobond

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.