Lauren Goodwin on Fed Rate Cuts, Market Reactions, and Inflation Risks

Fed Meeting and Neutral Rate Discussion

• 💡 The recent Fed meeting concluded the year with a decision that played out as expected, with one significant exception: Jerome Powell's acknowledgment of a range for the neutral rate.
• 🎯 This opening of the conversation around neutral rate estimates is crucial, as it addresses market pricing quibbles regarding the Fed funds rate looking ahead to 2026.

Market Reaction to Lower Rates

• 📈 As rates move lower and approach the lower bound of neutral (around 3% for the Fed funds rate), markets may signal 'no more' rate cuts.
• ⚠️ This could lead to the 10-year yield moving higher, essentially a curve steepening, if the Fed doesn't signal further cuts or remains on the hawkish side.
• 📊 While a move to 5% on the 10-year yield is considered extreme, it's not impossible given strong growth, a significant deficit, and supportive fiscal and geopolitical backdrops.

Economic Outlook and Labor Market

• 🎤 Jay Powell sounded more optimistic about the economy, suggesting that despite anecdotes of a slowdown in hiring and college graduates struggling to find jobs, 'everything's fine.'
• 📉 The speaker believes the economy has been in a soft patch this quarter, but a massive wave of layoffs is unlikely given current earnings growth and technological developments.
• 💼 Businesses are in a 'wait and see' mode regarding hiring, influenced by the Supreme Court decision on tariffs and the general business backdrop.

Inflation and Fed Strategy in 2026

• 📊 Inflation has remained around 3% for 12 months, and the base case aligns with the Fed's expectation that the inflationary backdrop will not be incredibly problematic.
• ⚠️ However, there are 'shadow dissenters' suggesting that if the economy performs well in 2026, the Fed might consider staying at the current rate or even implementing a hike.
• 🧩 Historical instances of double-dip inflation in the U.S. share ingredients that are possible in 2026, including supply-demand imbalances, tariffs, accommodative fiscal policy, and artificially low Fed funds rates, posing an outside risk.