Federal Reserve Chair Jerome Powell emphasized the need for patience amid uncertainty over the Trump administration's policies, saying there would be no immediate rate changes but that the Fed would proceed carefully.
Yields have fallen over the past few weeks, so "any decent excuse that rates move up a little bit after that big rally" may have occurred as the market digested the report ? which was a "little bit of a mixed bag" ? after the initial headline figure, said Jeff MacDonald, EVP and head of fixed income at Fiduciary Trust International.
The Fed meets this week, but the probability of another cut at Wednesday's meeting seems low amid elevated inflation and growth data, said Matt Fabian, a partner at Municipal Market Analytics.
"There are a lot of moving parts here with the potential to either help or hinder the Fed's quest for price stability and maximum employment" this year, noted BMO Deputy Chief Economist Michael Gregory, who says the Fed will "stand pat."
Municipals are underperforming USTs month-to-date, with the Bloomberg Municipal Index showing losses of 1.02% versus 0.92% for USTs as of Tuesday, but both are outperforming losses in corporates that are seeing 1.23% losses in January.
The Federal Reserve will be more cautious and slow rate cuts going forward, according to minutes of the December Federal Open Market Committee meeting, released Wednesday.
In his letter of resignation, Federal Reserve Vice Chair for Supervision Michael Barr said an attempt by the Trump White House to remove him could create a "distraction" for the Fed. He plans to retain his seat on the Board of Governors, which expires in 2032.
Analysts are unsure what the Federal Open Market Committee will do with monetary policy in 2025. The panel projects two rate cuts, but some analysts expect more, and others see fewer.
As the market prepares for 2025, there's a lot of uncertainty around what the new administration will mean for the macroeconomic environment and interest rates, the latter of which may be impacted by policy around the deficit, said Steve Shutz, portfolio manager and director of tax-exempt fixed income at Brown Advisory.
With investors now anticipating Wednesday's expected rate cut may be the last one for a while, "an overall bullish paradigm has been seriously weakened," noted Matt Fabian, a partner at Municipal Market Analytics, Inc.
Supply falls ahead of the final Federal Open Market Committee meeting of 2024 and the holidays but issuance still breaks records. The lighter calendar should provide support for the secondary market in the final weeks of the year.
The Federal Reserve chair is not concerned about President-elect Trump nominating his successor well in advance of the end of his term in 2026, saying he is "confident" he will have a productive relationship with the next Treasury Secretary.
Federal Reserve Gov. Christopher Waller, a Trump appointee, said that while recent inflation readings are concerning, monetary policy would remain restrictive even if the central bank cuts interest rates by another quarter-point this month.
"Earlier this month, Chair [Jerome] Powell noted that there was no 'hurry' to cut rates," noted BMO Senior Economist Priscilla Thiagamoorthy. The minutes, she noted, "confirm a broad support for taking a more cautious approach in easing monetary policy."
The Federal Reserve chair said there are no economic indicators calling for rapid rate cuts. He also addressed Fed independence, the impact of Trump's economic agenda and more.
Investors should "brace themselves" for further volatility, as uncertainty is likely to remain, said?Tom Kozlik, managing director and head of public policy and municipal strategy at HilltopSecurities.
Municipals largely stayed in their own lane Wednesday, digesting the large slate of new issues as supply dwindles heading into election week, with Bond Buyer 30-day visible supply falling to $5.56 billion.
Analysts remain divided about what the stronger-than-expected consumer price index will mean for Federal Reserve policymakers since the Fed appears to be concentrating on the labor market.
Federal Reserve chair Jerome Powell flagged a recent upward revision to income and savings data as a sign of economic strength. He said the information could factor into the central bank's monetary policy discourse during the Fed's next interest rate meeting in November.
This week, Federal Reserve Gov. Michelle Bowman cast the first dissenting vote at an FOMC meeting in years. On Friday, she explained why the economic data she's seen didn't convince her of the need to cut rates as much as her fellow governors thought.
In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.
Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
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