RISK MANAGEMENT

As anticipated, the Federal Reserve lowered the federal funds target rate by 25 basis points for the first time since December 2024, primarily driven by labor market concerns that have risen as jobs growth has slowed over the past several months, concurrent with a rise in unemployment claims.

Notably, inflation, particularly the Fed’s preferred measures of personal consumption expenditures (PCE) and core PCE, remains above the Fed’s 2% target, with policymakers anticipating it is likely to remain elevated for the next year or more. On balance, the rate cut, to 4.00%-to-4.25%, reflected a growing concern about the economic outlook. Fed Chair Powell characterized this cut as “risk management” to address the growing risks in the labor market, despite the upside risk to inflation from tariff policy.

Fed Chair Powell continues to follow a “meeting-by-meeting” approach to monetary policy, noting a heavy reliance on the incoming data — which presents a complication given the prospect for meaningful future revisions.

The monthly nonfarm payroll report is a good example. As we’ve seen recently, the report can be heavily revised on a monthly basis, and annual revisions can paint a substantially different picture. As widely reported earlier this month, for the annual revision through March 2025, the U.S. economy produced 911,000 fewer jobs than previously reported. The revisions were more than 50% higher than last year’s adjustment and the largest on record going back to 2002. On a monthly basis, they suggest average job growth of 76,000 less than initially reported. The data-dependent and meeting-by-meeting approach will make forecasting difficult for economists and market strategists alike, and could potentially inject volatility into financial markets. 

The bond market had a mixed response to the news: Intuition was that rates would fall, but the reality was that the market had well-anticipated the policy action and had, in fact, priced in only a small probability of a more meaningful cut. Both the 2- and 10-year Treasury yields rose marginally after the Fed meeting and decision, and the 10-year Treasury yield hit a two-week high just days after hitting the psychologically important 4% level.

Similar to bond markets, equity investors had anticipated the Fed’s move, though the trading session was volatile. After an initial spike on the news, equity markets ended Wednesday mixed, with the S&P down 0.1%.

Interestingly, equity markets resumed their upward move into new record territory in the balance of the week, shrugging off any anticipated volatility from Friday’s $5.3 trillion option expiration. A notable performer in the tech space was Intel, which sold a $5 billion stake to rival, NVIDIA, in a deal to jointly develop chips for PCs and datacenters: Intel's share price was up over 20% for the week. While valuations for the tech sector and the broader market remain far above historical levels, valuations alone are rarely a catalyst for repricing.