Macro Markets Episode 74: Fed Easing Resumes, Adding Tailwinds and Volatility to the Outlook
The Federal Reserve resumed rate cuts at its September meeting, gauging that risks to the labor market currently outweigh inflation risks. Mixed signals from the fixed-income and equity markets reflect the uncertain and complex outlook. Tune in as Matt Bush, our U.S. economist, and Evan Serdensky, portfolio manager on our Total Return team, cut through the noise, update our macroeconomic outlook, and discuss portfolio strategy for the road ahead.
This transcript is computer-generated and may contain inaccuracies.
Jay Diamond: Hi everybody, and welcome to Macro Markets with Guggenheim Investments, where we invite leaders from our investment team to offer their analysis of the investment landscape and the economic outlook. I'm Jay Diamond, head of thought leadership for Guggenheim Investments. And I'll be hosting today. We are recording this episode on Friday, September 19th, 2025. Now, as widely expected, the Federal Reserve cut its policy rate by 25 basis points on Wednesday, citing a weakening labor market.
Yet the Fed's next move is anything but certain. Growth is slowing. Consumer sentiment is kind of souring. But tariffs are expected to gradually push prices higher, which stoke some inflation fears. And markets are split. Bonds have started signaling caution while stocks keep breaking records. So this disconnect underscores just how unpredictable the current environment is. Now here to help us make sense of where we are, where we might be going and how our portfolios are positioned in this climate, are two of the leaders of our investment team, Matt Bush our U.S. economist and Evan Serdensky, a managing director and portfolio manager on our total return team. So welcome back, Matt and Evan, and thanks for taking the time to chat with us today.
Matt Bush: Great to be here, Jay.
Evan Serdensky: Thanks for having us.
Jay Diamond: Well, let's start with you, Evan. The 25 basis point cut was well telegraphed and priced in by the markets. But walk us through how we got here. What were some of the drivers of market performance for both stocks and bonds over the last several weeks leading up to this decision.
Evan Serdensky: For the rates market this year there's been two major themes. The first one is that there's been this push and pull of the effect of heightened inflation, but also a cooling labor market. And then, of course, the policy shocks that we've seen this year. And the net result has been a pretty large trading range. Call it 50 to 100 basis points across the curve.
But that range has been narrowing a bit and also moving a little bit lower. And then the other major theme has been curve steepening pretty much on all parts of the curve. The five tens is about 25 basis points higher on the year, tens 30s is about 40 basis points higher, and it's both been driven by fear in the long end, chiefly from heightened supply expectations, but also higher inflation uncertainty premiums.
But then also driven by the front end, where we're seeing a potentially lower growth and then expectations of a lower policy path as well. Recently, there's been a string of cooler labor market surveys and revisions, of course, and that's really been winning that push and pull for now and pushing rates lower into that range. And at the same time, it's been happening while inflation has been relatively in check.
So that's been a very good environment for rates. As you mentioned, Powell had largely telegraphed this move, especially at the Jackson Hole symposium, citing the shifting balance of risks. And then that was echoed again in the statement. And they are now viewing protecting the labor market progress as the highest priority. And that's triggered a investor mind shift, which in heavier flows into longer duration products lately investors locking in yields.
And that served to flatten the curve a little bit. Overall, this has been a pretty good tailwind for bonds. Equities on the other hand, as you mentioned are at the highs, it's really been nearly a one way up move since the April tariff vol. And that's mostly been driven by the AI enthusiasm as you can expect. But also conditions are just really good for equities now because they're backstopped by decent enough growth.
Tech earnings continue to surprise to the upside. Even with very high starting expectations and the whole ecosystem around the CapEx spend is driving this as well. And the technicals are strong. The high income consumer is driving a lot of flows. It's that wealth effect kind of playing out. And then the lower fed funds rate is happening mostly because of a good reason.
If this is insurance cuts then that's a good reason to cut versus fear around a dramatic slowdown in the economy.
Jay Diamond: So just a follow up for you, Evan. But now that the Fed has delivered on this expectation, what is your take and the market's take on what we know and what we don't know about the market outlook from here?
Evan Serdensky: Yeah. So the meeting was mildly hawkish I suppose versus expectations. But really within the standard IR band. What we don't know from here is if we're going to continue to see labor market weakness pull through, or if we're just adjusting to a lower break even job growth rate, which there's certainly a story you can make there.
The unemployment rate is probably going to be the best signal for that. So we're watching the September payroll report very closely, which we'll get in a couple of weeks here. And then also on the other hand is what's going to happen with inflation. Are we going to finally see inflation from tariffs. We've seen a little bit so far but not much.
Most of it's been getting absorbed. So those are the main questions for the future policy path.
Jay Diamond: Well it's good that we have Matt Bush here who's going to help us run through what we think of those things. But Matt, before we get to the outlook, run through for us the FOMC decision and particularly the rationale behind a 25 basis point versus a 50 basis point cut, which got some some chatter leading up to the meeting and also any information that you may have gleaned from the press conference.
Matt Bush: So the way I would characterize the Fed's move is that this was an insurance cut to guard against further labor market weakening. It's pretty clear that the move lower in job growth has increased. The Fed's concern about the trajectory for the labor market. It's really now the more urgent threat, even at a time when they're still somewhat concerned about upside risk to inflation and so because the Fed still sees rates as in restrictive territory. And now that risks to the dual mandate are more in balance or even tilting toward the labor market, they want to start the process of getting policy back to a more neutral setting in terms of 25 or 50. Powell indicated there wasn't much support for 50 basis points at this meeting, despite some of the market speculation that we could see a 50 basis point move.
I think the concerns they have about the labor market are really about what potentially could happen, not what has been happening. So there wasn't this need to move quickly and get ahead of the data, particularly because you don't want to fuel market concerns about economic weakness with a 50 basis point move. Markets are already pricing in a lot of easing over the next 12 months.
And so a 50 basis point move wasn't warranted in the Fed's view. I think the press conference, revealed the tough spot that the Fed is in and the fact that we might not see the smooth pack path back to a neutral policy stance with just a straight line down of consecutive cuts at the next several meetings. Powell definitely emphasized that downside risk to the labor market have become more acute.
But he also acknowledged risks to inflation remain tilted to the upside. He called this mix a challenging situation where there are no risk free paths. And as Powell said, that means they're in a meeting by meeting situation where the data will dictate what they do and so the expectation that what's currently shown in the dot plot is what's going to happen.
I think we have to acknowledge there's a lot of uncertainty in how the data will play out over the next several months.
Jay Diamond: Now Matt did we learn anything new from the updated summary of economic projections which accompanied the statement.
Matt Bush: I thought a few things were notable in the projections. First is that the economic numbers showed higher real GDP growth this year and next year, and higher inflation next year. But despite this higher path of growth and inflation, the path of policy rates was lower than the projections. And so that's inherently a pretty dovish reaction function. And speaks to the fact that the baseline outlook for the economy is okay.
But these cuts are intended as risk management cuts to make sure that the outlook stays okay. The other thing though, is I would say usually we focus on the medians in the dot plot of the fed funds rate, but there's a lot of dispersion on the appropriate path or policy rates. So ten dots saw three or more cuts this year, but seven dots saw one or less.
So it's a split committee. And for next year, the projections range anywhere from 3.9 percent to 2.6 percent. Even with the economic projections in a fairly narrow range. So I think that, again, just reinforces the point that Fed policy is far from a predetermined path. A lot of it's going to depend on how the data evolves.
Jay Diamond: The question for both of you before we move on to the outlook, Matt, but this was a kind of a unique FOMC meeting, if you will, and that we got newly confirmed Governor Stephen Miran, as well as, Lisa Cook, the governor Trump is trying to fire, in the room together. And Miran dissented.
He wanted 50 basis points, and he's the only one who who made that dissent. Just want to talk a minute about that, Evan. Were you surprised at all by the market reaction or lack of reaction?
Evan Serdensky: Yeah, like you framed it. The the markets actually only had a minor reaction, if anything. And I think that's testament to the fact that you really could have seen anywhere between 1 and 5 dissents in this meeting. And so it really wasn't going to be a surprise. And no matter what, it also wasn't going to change the outcome of a 25 basis point cut, which the market was largely expecting. So we've seen a little unclench in positioning across the rates curve and a little bit of mild re steepening that that makes sense to us. And we've been positioned for that as well.
Jay Diamond: Matt what should we be thinking about Fed independence given recent events, now and going forward.
Matt Bush: Yeah. Well on the dissent, I think it was a little bit surprising. There was only one we thought it was possible there could have been multiple dissents for a larger cut and a dissent for no cut at all. And so I think that the fact that there was only one from the new governor tells you there was a concerted effort to reach consensus and really protect the united front by most of the FOMC.
You know, on the broader question of independence, our view is that while there are some pressures on the Fed and Fed independence, the committee is going to stay committed to responding to the economic fundamentals and their dual mandate goals as the main driver of policy. And that's going to remain true under the new Fed chair next year, who might shift the tone of monetary policy discussions but is going to remain part of a much larger committee that's making the ultimate decisions.
There is a risk factor that we're watching. If the institutional framework that has insulated Fed presidents from political influence is undermined. That's a risk. But one, not one we see is very large.
Jay Diamond: Matt, we just posted our Quarterly Macro Themes, which provides a view into some of the issues that drive our outlook. So, let's just go through some of the themes and your, your views on, some of the, macro issues that the market's going to be watching. So let's start with tariffs and insulation.
Matt Bush: We've learned a lot about the tariff passthrough process over the last few months. And really two factors have led to a more modest impact on inflation than many expected. First is the fact that actual tariff collections have come in below what the announced tariff rates would suggest. So the realized tariff rate is still around 10 percent, even though the announced tariff rate is closer to 18 percent.
There's a variety of reasons for that gap. Two of the big ones that we talk about in our Quarterly Macro Themes are the fact that importers have been really strategic in reorienting supply chains away from China toward lower tariff countries, and also been able to reclassify some products into categories with lower tariff rates. Going forward, though, we're seeing the administration closing some of these loopholes, making country and product specific tariff rates more equalized so that there aren't these loopholes to exploit.
And so we expect that means the collective tariff rate should rise further in coming months. The other big factor limiting the impact on inflation has been the fact that domestic importers have absorbed a lot of the cost of tariffs so far. There is a number of reasons for that. They've had inventories acquired at lower cost to work down, and businesses have just been waiting to see where tariffs ultimately settle before making pricing plans.
Looking at business surveys, including recent ones, businesses are still saying they plan to pass more of the tariff cost on to consumers over time. We think that's likely to be more of a gradual process than originally thought, which means a lower ultimate peak for inflation, but a little bit more stickiness and drawn out process and inflation into and through the first half of 2026.
Ultimately, though, we continue to be of the view that this tariff pass through is a one time price level increase. And once we're past it, the rate of inflation should come down, which we expect to see by the end of next year.
Jay Diamond: Okay. What about the labor market? What do you think about that?
Matt Bush: Well, the big story in the labor market, as Evan referenced, is the downshift in job growth. As recently as July, it looked like non-farm payroll growth was running around 150,000 jobs per month, which is pretty decent. Then we got revisions and new data, and now we've seen just 29,000 jobs added on average over the last three months.
That's definitely a concerningly slow pace of job growth, but we think a couple factors make it less concerning than initially appears. First is that while labor demand is clearly cooling, labor supply is also slowing sharply, primarily due to a reduction in net immigration. And so that means that balance in the labor market can be maintained even with the slow pace of job growth.
Estimates suggest that could be anywhere from zero to 50 or 75,000 jobs per month. And second, while the unemployment rate is ticking up, the rise is more due to people entering the labor force and having a hard time finding a job not because more people are losing their jobs. So rising unemployment in any form is not a good thing.
But this low hiring, low firing environment has somewhat less risk of snowballing into a broader recession than if rising unemployment was due to layoffs picking up. So overall, we see unemployment continuing to gradually move higher to around 4.5 percent, before stabilizing next year.
Jay Diamond: Is fiscal policy going to have a significant impact on our outlook going forward?
Matt Bush: I don't know that I'd say significant, but it's going to have a modest impact or maybe moderate impact. It's an important reason why we expect the labor market and broader growth will stabilize in 2026. We don't see a huge fiscal boost next year, given most of the cost of the one big beautiful bill was just extending what's already in place.
But there are important provisions in there for businesses that should give investment a boost. And on the consumer side, some of the tax provisions are retroactive to 2025, meaning there should be a bump in tax refunds in the first half of next year. That should provide some support to consumer spending.
Jay Diamond: Where does this leave our outlook on economic growth and the path of monetary policy? Both this year and beyond?
Matt Bush: We think the economy's down shifted to a slower growth path, but now it looks to have stabilized at the slower growth rate. We saw pretty weak consumer spending in the first half of the year. But with markets recovering, some consumer sentiment measures recovering policy uncertainty coming down a little bit. It looks like consumption has picked back up somewhat, especially at the upper end of the income distribution, which is sensitive to gains in financial markets.
We also have an ongoing tailwind from strong investment in AI infrastructure, which added almost a percentage point to real GDP growth in the first half of the year. And that should continue to add to growth going forward. So overall, we see growth around 1.7 percent this year and a similar pace in 2026. On the inflation front, as I said, we see some stickiness for the next six nine months as tariffs are gradually passed through.
Ultimately, we think we should see some fading at the end of next year, getting core inflation to around 2.6 percent. And for the Fed, what this means is we think in the near term we'll continue to see some risk management cuts, probably 1 or 2 more this year to guard against further labor market weakness. If, as we expect, the labor market does stabilize and inflation is a little bit stubborn in the first half of next year, we think they could pause cuts for a few months, but ultimately we see them getting policy back to a neutral rate of 3 to 3 and a quarter by the end of next year.
You know, around that baseline outlook, the key risk is that we do see a sharper deterioration in the labor market that we expect, which could prompt faster and deeper rate cuts than in our baseline forecast.
Jay Diamond: So Evan with these inputs into your positioning, what are your views on market outcomes and how are you approaching portfolio strategy? And let's start with duration positioning, Treasury yields, shape of the yield curve.
Evan Serdensky: So we expect the continued push and pull to keep affecting the rates market. With the net effect of leaving rates relatively rangebound. But as I mentioned earlier, that range has been drifting a little bit lower. You've had lower ceilings and lower floors. We've had the view that expectations of the terminal rate would be moving lower, mainly because of our view on the labor market.
Which Matt’s team has done some really great research on and has been exactly right on. The market is basically caught up to that view now. So we're close to fair value across the curve. Maybe we get some higher growth impulses into the end of the year, but technicals are still pretty strong. So we we also wouldn't be surprised to see rates break lower from here.
We still like the steepening trade, but we've reduced it a little, especially when the ten year hit below 4 percent for a moment there. And we still like outright duration. But we've reduced that on the margin again when rates kind of hit 4 percent. We're also utilizing a strategic allocation to TIPS where we think medium and longer term break even rates are still surprisingly low given the environment that we're in.
So that's a way of isolating your real rate exposure, but having protection from stickier or slowly rising inflation from here.
Jay Diamond: And what about overall risk appetite and, maintenance of liquidity buffers in portfolios.
Evan Serdensky: So our overall betas or risk positioning are near average at this point. We're overweight higher quality assets that have done very well. And we've started layering in a few hedges to protect the strong returns that we've seen year to date. You could see a mild retracement in spreads for any number of reasons going into the end of the year. Liquidity wise, we have higher than usual buffers.
We've been optimizing carry in the portfolios with high quality assets. So that's left us with plenty of room to spend if we see valuations cheapen up from here. We were really hoping for a greater opportunity in April. We did add some risk, but the sell off was pretty short lived and we've already sold that risk down.
Jay Diamond: And based on the economic outlook, what's your view on credit performance, but more specifically how much you're going to be paying for that credit performance in terms of valuations and market positioning?
Evan Serdensky: So fundamentally we're okay with the backdrop for credit from here. It's relatively benign. We are seeing some quality decompression occurring. But blended yields across diversified high quality credit earns in the mid to high single digits. The higher yields are actually compressing spreads a little bit because you have yield focused investors across the curve that are a little bit more agnostic to spread valuations.
So overall we're constructive. But we are vigilant to the fact that valuations are tighter on a spread basis. But that being said, we're still finding plenty of opportunities, notably across ABS and structured credit which are trading at relatively elevated spread percentiles versus investment grade corporates and more traditional corporate credit segments.
Jay Diamond: Where are you finding value and what are you avoiding and what kinds of yields are you seeing in the market?
Evan Serdensky: The best opportunities right now, I think, are in monetizing very high interest rate volatility. To put that into perspective, the implied volatility on a three month forward ten year Treasury is about 80 basis points annualized. So that's one standard deviation of plus or -80 basis points. That's a lot. It's come down a little bit from elevated levels over the last couple of years, which have been more in the 100 to 140 basis points range.
But to put that into perspective, that implies plus or minus 5 to 7 basis points daily, which on a price basis is about half a percent to one point in daily price fall. That's too high and more in line with what you might expect from the equity markets. We think there's a number of reasons that that's set to come down.
The future composition of the FOMC, being one of those as we get a new chairman here, you might see greater use of forward guidance that will implicitly push the ranges down and expectations for the policy path. There's a number of ways of expressing this view. You can obviously be outright short of interest rate vol. But one of the best expressions we think is across the mortgage backed security space, which is a segment that is sensitive to interest rate volatility, where you need to get compensated for the potential prepayment risk or cash flow uncertainty risk.
And right now, you're getting more than compensated, in our opinion, especially in call it near production agency coupons, but also finding plenty of opportunities in the non agency space as well. Things that we're avoiding are primarily in the CMS categories where office is still a huge overhang. We see really binary outcomes on a lot of these deals.
And when we look at the pricing right now it's more or less price to the probability weighted outcomes. But in reality you're not going to get that scenario. So we find it challenging to get really excited about kind of average valuations.
Jay Diamond: Well this has been terrific. Thank you guys both for taking the time to chat. But before I let you go, I just want to ask, Evan, to start with you, what's a main takeaway you'd like to leave our listeners with today?
Evan Serdensky: We talked about it a lot and in the past on other podcasts and venues. But you are starting at very attractive starting yields, which means that you have a better potential return environment for fixed income at this point. So we think it's a really exciting time to start looking at the fixed income market.
Jay Diamond: Terrific. Matt, any final thoughts from you?
Matt Bush: Yeah, I might just echo that positive view for the fixed income market. In addition to high starting yields, we have the backdrop of the Fed resuming rate cuts and really the manner that they're doing that in, which is aiming to preempt economic weakness and sustain the expansion. So I think both of those factors further support the outlook for fixed income.
Jay Diamond: Well, terrific. Thanks again for your time, Matt and Evan, I hope you'll come back and visit again with us soon. And thanks to all of you who have joined us for our podcast. If you like what you are hearing, please rate us five stars, which is how people find us. And if you have any questions for Matt or Evan or any of our other podcast guests, please send them to MacroMarkets@GuggenheimInvestments.com, and we will do our best to answer them on a future episode or offline.
I'm Jay Diamond and we look forward to gathering again for the next episode of Macro Markets with Guggenheim Investments. In the meantime, for more of our thought leadership, including our recently published Quarterly Macro Themes, visit us at Guggenheim investments.com/perspectives. So long.
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