FOMC Recap: One small step towards neutral

In its September meeting, the Federal Open Markets Committee (FOMC) lowered the main policy rate by 25bp to an upper bound of 4.25%. This is the first reduction this year and confirms the dovish pivot previewed in Chair Powell’s speech at Jackson Hole in late August. The Fed has clearly shifted its focus to arresting labor market weakness as it views that inflation (absent tariffs) will not accelerate. We think the Fed will continue to cut this year and next until the policy rate reaches 3%, but that inflation will remain sticky and well above target throughout 2026. For US r ates, we found the results of today’s FOMC to not be dovish enough to push market pricing for the cycle measurably lower. Given that and a fair amount of time before the next major market moving event, we close our long 2yr notes from 3.93% at 3.52%. Our initial target on the trade was 3.50% but decided to hold the long into this Fed meeting for optionality – but without any further driver today we close the trade, looking to re-enter at more favorable levels.