The September jobs report was exactly what the FOMC needed to justify their stance on monetary policy. The job gains in September had been expected to total 90,000, but were only 29,000, and the 162,000 jobs initially reported for August were revised lower to 133,000.
Headline unemployment rate rose from 4.1% to 4.2% but that was due to a rise in the labor force that exceeded household employment growth, both positive indicators.
Much has changed in the economy and markets since the beginning of this year. The 2-year note was yielding 3.47% on December 31st, Fed Funds were 3.63% following the Fed rate cut at the December 2025 FOMC meeting, and the December 2026 Fed Funds future was implying that the overnight rate would end the year at 3.00%.
The equity market continues to rally to new highs as consumer confidence has been buffeted by the 250th anniversary of the United States and the 38 days of the World Cup soccer tournament. The rally has continued despite new Fed Chairman Kevin Warsh’s frustrating abandonment of the full disclosure policies of the last three Fed chiefs. Ignoring his repeated hawkish calls and specifically citing the overnight Fed Funds rate as the Fed’s main policy tool, he has yet to raise that rate. We estimate the probability of the committee hiking in September is about 50 percent.
When Chairman Warsh took over as head of the Federal Reserve, the consensus opinion was that the economy had begun to reaccelerate and that additional rate cuts would not be necessary. Warsh, while noncommittal, seemed to confirm that view at the conclusion of his first Open Market Committee Meeting. He followed up on those comments when he participated in the ECB Central Banking forum saying inflation was too high. This week he again reiterated that view in Congressional testimony saying the Fed would not tolerate persistently high inflation.
The new Federal Reserve Chairman, Kevin Warsh, last spoke publicly about policy at his April confirmation hearing. He expressed his plans to amend the Fed in several areas of operation. Specifically, he wants the Fed to return to their original dual mandate of full employment and price stability. He suggested that the committee had engaged in mission creep in studying climate-related, counterparty, and cybersecurity risks. All valid concerns but probably best left to Congress to debate.
April marked a change in market psychology as consensus thinking shifted from a slowing economy and the need for additional rate cuts to an economy seeming to reaccelerate and the possibility that the Fed’s next move will be a rate hike. What’s confounded market watchers is the price action of both the bond and stock markets.
As the war with Iran drags on and the tactics seem evermore chaotic, the capital markets are normalizing after the extreme volatility that gripped them six weeks ago. The two-year note is trading at 3.79%, well below the 3.99% touched at the start of the conflict and the 2-year/30-year yield curve stands at 111 basis-points, midway between the 94 – 140 basis point range this year. Equally surprising is the equity market. The S&P 500 which had “corrected” by 10% at the end of March and had many market watchers forecasting a prolonged bear market has now retraced nearly all of that loss.
The capital markets have been upended since the start of the war with Iran. The price of oil has skyrocketed, dragging the price of bonds sharply lower. At the time of this writing, the 2-year note is trading at 3.74% yield to maturity, the highest since last November. Similarly, the yield-to-maturity of the 30-year bond has risen to 4.87%; below the 4.92% touched in January, but 25 basis points above where it started the month. The logic for the rise in interest rates is speculation that the spike in the cost of oil is going to filter through to the CPI making it impossible for the Fed to cut rates further.
While we’re only one month into 2025, January has felt more like an entire year given the market volatility and social unrest witnessed during the month.
President Trump’s action during month, namely the capture and incarceration of Venezuela’s President Madura and his wife caused quite a stir especially since the President at one point suggested he was the acting President of Venezuela. In Minnesota two individuals were killed by ICE agents in separate incidents promoting anti-ICE protests resulting in a new Bruce Springsteen recording detailing the incidences. In some ways it feels very much like the anti-Vietnam protests of the 1960’s.